Administration abstract:
“Navel gazing” alert: This submit doesn’t include any actionable funding concepts however reasonably explores how I can enrich my very own funding course of sooner or later by incoprorating some measures of Inventory worth and basic momentum.
Tour: My secret interest
First I’ve to confess that for just a few months now, I do have a secret interest: I’m watching regularly a Wikifolio (Wikifolio is a German/Austrian platform the place everybody can arrange a “fund” and different traders can take part) from an Austrian dealer with the identify Richard “”Ritschy” Dobensberger.
Not solely has he managed to draw 160 mn EUR in investments into his portfolio however he has averaged 33% CAGR over the past 13 years, leading to an general efficiency of round 4000% which is basically actually exceptional and places him into the highest of any dealer I do know.
Ritschy’s technique is comparatively easy: He has a universe of some dozen well-known, comparatively unstable/excessive beta shares and buys them once they appear go up. In the event that they proceed to go up, he retains them and even provides, in the event that they go down he sells them extraordinarily disciplined.
As soon as in a Podcast he mentioned one thing alongside the strains: “It’s like in soccer. A soccer coach selects the gamers which might be at the moment in nice form, not those who’re out of practice”.
Not each commerce works, however those who work effectively (like Rheinmetall) transfer the portfolio massive time.
To present Ritschy some credit score, though it sounds easy, it’s clearly not that straightforward to execute, nevertheless it clearly reveals one factor: Momentum as an element works fairly effectively, particularly since round Covid.
Don’t fear, I received’t flip right into a momentum investor anytime quickly as a result of I feel I don’t have the psychological set as much as run such a technique, however I feel I’ve ignored inventory worth momentum in my funding course of for too lengthy.
Ignoring momentum thus far regardless of some noble intents
For the longest path of my profession I’ve both ignored momentum or really invested towards (damaging) momentum. Prior to now, this has general labored fairly effectively, however I feel I left numerous return on the way in which.
I had contemplated introducing momentum into my investing course of a number of instances. Right here for example is a devoted submit from 2012 (13 years in the past !!!).
This was my abstract again then:
That was a good perception, however sadly I by no means adopted up. I reasonably did the alternative, akin to documented on this submit from 2016:
So after pondering that I used to be at all times promoting too early, I bought the GTT place which turned a multi-bagger (~5x) and reinvested right into a inventory that turned out to be a price lure.
Why didn’t I comply with up on it ? To be trustworthy, I have no idea for positive however the principle cause is almost definitely that I outperformed my benchmark anyway for an additional 6 years till 2019. Why change a system that works ?
Nevertheless, together with 2025 YTD, I’ve now underperformed in 4 out of the final 7 years.
The present market appears to be extraordinarily momentum pushed, which clearly is one issue of the current underperformance of my portfolio as I’ve ignored it perhaps for too lengthy.
Weaknesses in my present course of:
my more moderen actions, I recognized the next points:
- danger of ending up in worth traps
- including principally to positions on the way in which down
- not including to place that work effectively
- promoting too early
- fallacious prioritization of watchlist by solely specializing in “cheapness primarily based on historic numbers)
- lacking out on a diversification angle
.
What does academia / statistics say
There’s numerous proof that momentum is a robust “issue” in explaining inventory returns and particularly “alpha”. i.e. constructive outperformance.
Here’s a abstract desk generated type ChatGPT after I requested concerning the 10 most vital research:
What measure precisely is often used as a proxy for momentum ?
The “Quant literature” often mentions 6 month or 12 month momentum, typically within the type of “6 month -1 momentum” or “12 month -1 momentum” which excludes the latest month, i.e. trying on the 6 or 12 Month efficiency 1 month in the past.
Why is that this ? Plainly the latest month is statistically “noise” and even negatively correlated with subsequent inventory returns. So ignoring the returns of the final month in figuring out momentum appears to enhance leads to these research.
There was a current fascinating submit on Klement on Investing that confirmed that utilizing each time durations, i.e. 6 & 12 months momentum appear to be even higher.
Relying on the research, constructive momentum is then confirmed if the 6M or 12M worth return is both constructive or constructive AND better than the danger free charge of return. Most research than make investments into the very best decile momentum shares and brief the underside decile of the shares with the worst momentum.
Time horizons
Typical momentum methods require fairly frequent rebalancing as a way to obtain their alpha, which is clearly not my purpose.
Below German Tax regulation, often realizing positive factors can also be not the very best technique to maximise after tax returns. This side is usually not coated in educational research.
To be trustworthy, even when a mechanical system would yield higher outcomes, I nonetheless take pleasure in being a inventory picker and I’m really ready to sacrifice some efficiency for the enjoyment of analyzing single firms.
Nonetheless I feel I can enhance my course of by together with some features of inventory worth momentum.
How one can embody inventory worth momentum into my funding course of going ahead
As talked about in my Q2 Efficiency evaluate, I wish to embody inventory worth momentum on a extra systematic foundation into my funding course of.
My principal software for it is a spreadsheet which round ~100 most fascinating shares (together with all my portfolio holdings) that I’ll examine to one another primarily based on high quality (measured by some standards), valuation (i.e. low cost to my “honest worth) and momentum.
The components high quality and valuation can attain a most of 14 factors. Momentum will get accounted for within the following means:
I outlined a momentum rating that will probably be added to or subtracted from the entire rating.. The Momentum Rating can go from -2 to +2 in increments of 1.
As a primary step, I’ll assign a rating of +1 if the 6-1 month efficiency is >5%, -1 if efficiency is <-5%, else 0
In a second step, I’ll add +1 if the 12-1 month efficiency is >5%, -1 if <5%, else zero.
So relying on momentum, a inventory can get a max of +2 added or max -2 deducted. This rating is clearly not primarily based on rigorous again testing, it’s extra a form of “intestine feeling” and it serves one principal function:
Assuming that each one different features are equal (High quality, valuation) I’ll prioritize greater momentum shares to decrease momentum shares. This is applicable to each, shares I wish to analyze extra deeply and shares I wish to add to or that I wish to promote for rising liquidity.
Basic momentum
As well as, I additionally mirror the basic momentum in my qualitative rating. I’ll give some extent if the final observable EPS quantity went up, zero factors in any other case (no damaging values right here).
That is the way it seems in apply:
That is an abbreviated snapshot type my sheet that reveals how this works in ideas with simply my portfolio firms:
I don’t use this sheet to slavishly comply with the rating however reasonably as a place to begin for additional evaluation. For example, some individuals requested me if I might add to TFF. If I have a look at my mannequin, including to TFF is clearly not my prime precedence. Reasonably the alternative.
GESCO for example doesn’t rating that effectively in the intervening time, however I see some potential for future enchancment. However nonetheless, I sized the place small because the rating isn’t that good.
However I additionally would nonetheless add (cautiously) to a damaging momentum inventory like Novo Nordisk if high quality and valuation appear to be engaging sufficient.
Am I 100% positive if this may enhance my (relative) outcomes ? I have no idea, however I do assume that including this extra perspective may assist me within the mid- to long run.
What ChatGPT thinks of my strategy
I uploaded this doc to ChatGPT (5) and requested it what it thinks about my strategy. That is the end result:
The overlay technique that it instructed within the subsequent step nevertheless is just too sophisticated for my easy inventory picker thoughts. However the criticism as such is clearly legitimate.
Due to this fact I requested it for a less complicated algorithm handle the problems which it offered:
To be trustworthy, I discovered these guidelines fairly useful and can attempt to implement them going ahead in addition to it mirrors my very own pondering fairly properly.
When requested concerning the dangers of including a momentum overlay to basic inventory selecting nevertheless, ChatGPT got here up with just a few factors which might be additionally value contemplating:
Remaining thought:
Whereas I don’t like to make use of LLM’s to create content material, I discover the dialog with these fashions typically useful if I ask them concerning the reverse case or dangers. This actually enriches an article in my view.
To be continued…..
