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Podcast: Momentum- The Anomaly that Persists (Episode-6)



Host Deepak Shenoy (CEO) interviewing Prashanth Krishna (Trading, Momentum Portfolio) on the Momentum Strategy and why it’s the anomaly that persists.

Capitalmind offers the Momentum Portfolio as part of Capitalmind Premium (subscription service) in Wealth and as part of our Wealth Management Service.

What’s the definition of momentum?

Stocks moving in one direction continue to do so. Speculation? No, Momentum is a factor identifying a stock that is going up and that continues to do so. As part of Momentum, we are not asking why – we’re just identifying when this trend is happening and when it’s stopped. Same exercise on the way down as well.

We are betting on the trend of the market, not taking a contrarian view.

Why does momentum work?

We have research going back decades (generally in the US and other developed markets) that clearly shows that momentum works. We can show the persistence and impact of momentum but the reasons aren’t very convincing (Rory Suterhland anecdote on knowing something works but not having the exact reason why).  One of the best reasons I’ve come across attributes this to behavioral factors. Investors underestimate at beginning and over-estimate at the end. 

Another is asymmetric information – if you know or have figured out something about a stock you will start to acquire more and more shares. As information trickles in, people will jump on the bandwagon and others will replicate. The stock goes from under-information to over-participation driven by FOMO and greed.

Isaac Newton story about the South Sea Company, He got in, made 100%, got out, but jumped in once again on peer pressure and then eventually lost everything.

How long do you hold a stock for and what are the portfolio construction strategy, diversification criteria?

We don’t buy for life like Buffett. The average holding period is a couple of months. We know something about the stock but simply not enough to make long term hold decisions.

Price is the key, price action is the trigger for our investment and exit choices. We don’t want a low liquidity stock. We would rather not have a high volatility stock either that keeps hitting upper and/or lower circuits. The best fit is a stock that goes up steadily without making waves. So avoid the parabolic rise? Yes, HEG is an example that after it hit all time hights it was subject to indefinite growth style justifications. You can’t start with momentum and then transition to fundamentals.

25-30 stocks is an optimal choice. Even a 50% fall in Vakrangee where couldn’t get out.only caused a drop of 1-2% of your overall capital which is still manageable.

How do you re-balance?

Re-balancing is meaningful – selling and buying has costs, taxes and slippage. Monthly is a sensible level. Let it ride for a month unless there is extreme news. At the next month, re-visit is the stock still worth holding.

What do you do in times like these (months leading up to Aug 2019) when there’s not enough momentum?

In Bear runs like the current environment, we stay in cash if we can’t find 30 stocks.  If we only find 20 stocks (instead of 30), we have 33% in cash. 

Momentum is often viewed as a negative because of the dangers of manipulation (promoters and operators driving prices). Since you don’t have filters that can track manipulation – how do you deal with this?

Manipulation happens at every level, at accounting, price, balance sheet – even an analysis of fundamentals have risk from misleading or false financial statements. Manipulation is easier in a low volume stock. If you filter on high volume, it’s tougher to get caught in a pump and dump.  Between filters and diversification, we avoid mistakes or avoid mistakes that we can’t recover from. In Vakrangee – we rode the stock on the way up and then down as well! Once the lower circuit hits, you can’t exit no matter what your back test claims.

Do you get time to exit?

We’re scared of parabolic charts – they become waterfall when the stock comes down. The lower circuits often kick in (unless it’s an F&O stock) so it’s not easy to get out. Fortunately, momentum normally exhausts over time so it gives you down to exit.  It’s the series of small waterfalls kills an investor in a stock.

Pitfalls or things to watch out for?

How will you build your version of Momentum? If you’re not looking at volume filters – that’s a big risk.  What’s the universe? Momentum today would be say 50% in large and 50% mid cap. Outside of a wholescale fraud, you should have regular market risk. When there’s a drawdown, will you have the conviction to exit the stock like your model tells you to or will you be loss averse? Alpha comes from behavior rather than the genius of the strategy. Have faith in the strategy. The biggest failure point is us. 

What are the returns like?

Return of this strategy is linked to the market. This isn’t a contrarian portfolio, In a bear market you don’t do great either. Above Nifty returns are achievable based on the track record. During the bull market days you could easily hit the higher end of this range and the numbers looked abnormally great in the short term. However, draw downs are similar to Nifty.

Your portfolio make-up changes from small to mid caps in the bull runs to larger companies in the bear market. You’ll know this is working when Momentum falls in line with Nifty even on the downside but has beats it during the upside.

This has played out in foreign markets as well?

Yes, in US like markets we have some data going back nearly a century and this very much works. Low volatility strategies don’t always prosper but Momentum is an anomaly the persists. Just buying small cap stocks looks great in bull markets but risk adjusted doesn’t really do better than large cap. Momentum gives alpha even after adjusting for risk.


Deepak: Hi and welcome to the Capitalmind podcast. Once again, we have a very interesting show for you today. This is Deepak Shenoy from Capitalmind. I have with me our head of trading Prashanth Krishna, who has been also managing our momentum portfolio for the Capitalmind Wealth PMS, and the Momentum Portfolio in Capitalmind Premium. Now this is a very interesting point, where stocks that are moving, continue to move, in the same direction, and therefore provides an opportunity. So Prashanth has been doing a lot of research on it, and I will speak to him a little bit more in detail on what momentum investing is. Firstly, Prashant, hi and welcome to the show.

Prashant: Hi Deepak. Thanks for having me here. Nice to be talking to you on something I really love to do.

Deepak: Yes, your tweets have been showing it quite as much. Prashant. In fact, I think a lot of that we are trying to try and concise it and fit in from all the learnings you had so far. But you know before we go anywhere, what’s the definition of momentum investing? What are the different meanings of the term? Because I had multiple people seem to call things “momentum,” and which of those do you prefer?

Prashant: Hey, that’s actually a very interesting question. What is momentum investing in itself? Because there are actually very serious question. I mean this is a very interesting question for a simple reason that people feel that momentum investing is more of a speculation, which it is not. Momentum investing is a factor which, where we are trying to identify a stock that is actually doing something in the anticipation that it will continue to do something.

Prashant: When the stock is going up, we anticipate that the stock will continue to go up. We are not asking why it’s going up. We are just saying because of the historical reasons, the stock that’s in motion is basically continuing to be in the motion of the uptrend. The same works in a down trend. I mean the stock that is continuing to fall, may continue to fall. We are just trying to bet on the trend, bet on the, what do you say? I mean flow by the river kind of thing. We don’t want to go against the trend of the market. We are just trying to float by the trend of the market. If the market is going, the stock is going up, we want to be with that stock.

Deepak: That’s a brilliant point, Prashant. In fact, you know we’ve seen more stocks now. A stock that falls 50%, then falls another 50% from there, that’s quite reasonable. But then, thinking about momentum from the point of view of a stock that goes up, continues to go up, why do you think like maybe momentum works because most of us think the other way. If it’s gone too far, it’s going to come back down and all that. But why does momentum work in general?

Prashant: That’s another very interesting question. That’s unfortunately not been very much answered for a simple reason that, I mean we have research going back to decades on why momentum works. Basically, it’s showing that momentum works, not just why. But the point is that no one has been able to figure out why it works in the sense that there’s no real reason that you can come down to saying that this is the exact reason why momentum works.

Prashant: So basically, what most analysts have come down to is that it’s more for behavior one, wherein we, as a investor, we don’t want to buy a stock that is already high, very high from the high. I mean, it’s like a frog in the pan kind of thing. If you are starting to boil, the frog doesn’t realize the heat. We underestimate at the beginning, and then overestimate at the end. So that actually drives momentum. That’s what is a driver of momentum. Again, why does it drive It’s more of a behaviour, in my opinion, rather than any real value add on a business, I mean wherein you can actually say this is the exact reason it works kind of thing. It’s also basically because there’s a lot of asymmetric information in the market. Basically people who do a research are having much more access to information than the someone like me on the street, who may not be doing that amount of research.

Prashant: So if you know something about a company, you may try to acquire more stock of the company, in the process pushing up the price. That price push up, while I don’t know the reason, the price is being pushed up, for me, that’s a trigger to get into the stock. So more and more, as the information keeps filtering from the guy who has researched to the guy on the street, more and more people want to jump on the bandwagon to get a … I mean, try to maximize from the trend that’s going up. At some point, every trend ends, but the trend continues because of the fact that from under-information we have now come to over information. Well, from zero participation, now, everyone wants to participate.

Deepak: In a way, I guess they have a fear of missing out.

Prashant: Yeah.

Deepak: There’s greed. There’s that point which is “my friend owns this stock. It did really well for him, and therefore I’lI also get into the same stock.”

Prashant: Very true. I mean, there’s this Newton’s story of how we got into South Sea Company way early. Then he got out because we realized that this was not going in. I mean, this was not going to be a very big thing. But then he saw everyone left, right, center making money and the stock going up and up. So he’s decided, “Boss, this is not something I should let it go,” and actually jumped into it at a very peak. And the point is that it’s a FOMO factor, as you rightly said, it is a FOMO factor. We don’t want to miss out. We’d just ride the trend. From not being participatory, everyone wants to participate. It’s a herd. So more the herd the higher it takes up. But finally, every herd has to meet a end. So even momentum in that sense has a end.

Deepak: That’s an interesting point. So now, you obviously don’t hold forever. You probably hold only until the momentum goes to an end. But tell us, how do you select stocks? Is it just price? Is it volume? Is it something else?

Prashant: So I mean, basically, if you look at holding periods. I mean, Warren Buffett says, “Buy for life” kind of thing. We don’t buy for a year, forget life. Our most holding period, on average, you will see a momentum stock being held for maybe few months, at the most. So the question is how do you, I mean what are the factors that you use? So, price is a key. I mean price action is what is determining our reaction to whether I want to buy this stock or not.

Prashant: But price is not only source of data point for us. For us, volume for example is a key because you don’t want to get in stocks where you have to, what do you say? Will be very tough to get out when the trend ends. So you don’t want a low liquid stock that may look interesting from a point of view of the charts or point of the momentum. But actually when you execute, you don’t want to have a stock that keeps in upper circuit.

Prashant: You don’t get it at very easy price and at a lower circuit, you can’t get out. I mean you don’t want to get into stocks without a really low liquidity. And volatility is a key to me. For me, lower the volatility, the better because you don’t want extremely volatile stocks that are jumping up and around doing about 20% positive, today, 20% negative tomorrow to be in your portfolio. Yeah, it may still run up, but point is that you want a smoother run stock that continues to go up without actually making big waves. The bigger the wave, the sharper the fall is.

Deepak: So, the parabolic rise is to be feared more than admired, I guess?

Prashant: Yeah, I mean your final momentum is parabolic. So at that point of time, everyone wants to be in that stock. HEG, for example, the final last couple of weeks, everyone was talking about HEG, I mean a company like HEG you can grow to endlessly. But that’s not true. Anything and everything has limits. So once you have a parabolic rise, the only way that it actually rewards us is a parabolic fall.

Prashant: And parabolic falls also means that you are stuck in a position that you don’t want. So liquidity, volatility, a lot of factors, I think has to influence while price being the main foundation of the whole strategy.

Deepak: That’s interesting. But then you obviously don’t bet all your money on one stock. So what is the portfolio construction strategy and how do you play it? If you’re doing it today, the next month? How do you do this?

Prashant: So yeah, here’s is the thing. So when you say portfolio construction, I mean at momentum, we are concerned with price, which also means, honestly, we are not as good or sure of the company we are betting on. It may not be just mere ticker symbols. We may know something about the company, but we may have not understood the company to the extent that we will be willing to hold it forever kind of thing. In that sense that diversification acts as a positive than negative for us in momentum because the broader portfolio is, the smaller your bet size is in terms of one stock. So basically at a single level, a stock if you even catch a bad stock or two bad stocks, it should not plummet your portfolio to extent that it will take months or years to recover.

Prashant: So what I’ve observed in the texting, what I’ve done is a 25 to 30 is a very optimal level. At 30 stocks, you are 3.33% exposed to each stock is exposed to 3.33% of your capital. 25 is 4% but still a 50% fall. like what happened in Vakrangee where it was momentum. It had parabolic rise and a parabolic fall which meant that you couldn’t have got out if you wanted to get out.

Prashant: So in the cases like this, though you may be hit with a 50% fall, you are still exposed to maybe 3% of your capital which means or 4% which means just you’re losing out on 2% of overall capital, which is much more acceptable.

Deepak: Interesting. That means a 50% fall in your stock has a sub 2% impact, if you take 30 stocks in a portfolio and therefore 25 or 30 is your optimum kind of mark, position, numbers.

Deepak: What about, when do you get out? How do rebalance? What happens then?

Prashant: Rebalancing, I mean there’s a concept top priority of timing, luck kind of thing. I mean how frequently you have to rebalance. I mean you can rebalance on a daily. You can rebalance on a weekly, fortnightly, monthly, quarterly, you can go anywhere. But one of the things to understand about momentum is momentum is if meanly working on a longer and a shorter timeframe. So at a extreme short term, it’s actually meanly working an extreme long term, it’s again, meanly working. So we are trying to cash the middle points kind of thing. One of the things about rebalancing what we have to keep in mind is that rebalancing is not just about just changing a ticker symbol. It’s about selling stocks, buying others, which means that there are costs to it. There are taxes to be paid.

Prashant: There are slippages that will take place. So everything, if you factor it all, so when you factor it all when you factor it all, what happens is that more you trade, more you transact, more your charges but less you transact also doesn’t mean you go to a yearly timeframe. So what I have observed is monthly is fine. At a monthly level, you are looking at a stock, giving it enough time, the small variations in stocks or variants of the stock will make you exit the stock kind of thing. So that gives you a optimal level of rebalancing in a way.

Deepak: So you let it ride for a month. And even if it has fallen in the interim, you’re not going to take any action unless, I guess there is extreme news but in general, your idea will be rebalance once a month wherever possible.

Prashant: Very true because again, once you start tinkering with the system, I mean exiting a stock because I didn’t like or someone, I mean a brokerage has given a sell then the whole backtested doesn’t hold up kind of thing. So, the whole idea is unless you think that this is a fraud case wherein it’s better to save on capital, than go for the opportunity. I mean the opportunity cost is we are willing to let go. The idea is to stay the course, wait for the ram … I mean run the system the next month. Check out whether the stocks are still worthwhile to hold or not worthwhile to hold.

Deepak: That’s interesting. And then sometimes like maybe now in the markets, there’s hardly any momentum so you might not even find, what do you do with that? You might not find momentum in 30 stocks. What happens then?

Prashant: So yeah, I mean when a market goes through a bear run, one way of limiting your damage, your downside is to actually get out of old stock. But that’s actually not the best way. The best way is actually wait for the stocks to go themselves, which happens when in markets like this because you may not find 30 stocks that are in momentum to fill your portfolio.

Prashant: So assume you find 20 stocks in a 30 stock portfolio. I mean you are basically, you are 30% now in cash. So basically the idea is you invest only 3.3% in each of the 20 stocks. But the rest 33%, you keep in cash for the opportunity whenever that arises. I mean when the market failing 2008, for example, for a few months there was no opportunity. So there’s no point. I mean you are just a 100% in cash though cash is not a position in the portfolio. But we went to cash because there weren’t any opportunities present to take advantage of.

Deepak: Yeah, I guess cash is a position now definitely. The best performing portfolio in the last one year probably has been cash itself. But interesting here, okay, because I also want to talk about some of the things that people keep mentioning in our fund. People who would think fundamentally, think of momentum as a negative because of manipulation. People manipulate stocks, operators drive stocks. Since you don’t filter out a stock because maybe it is shady or whatever, how do you perhaps see the risk and you’ve seen this in the past in your own portfolios, perhaps. Maybe some learnings from how maybe manipulation was avoided or somehow did not pose a significant risk to the portfolio?

Prashant: Oh manipulation happens to every level. I mean price just a output. Manipulation happens at an account point. A company like Vakrangee for example, whether it was manipulated in price or not, your balance sheet was so good that you had to accept that boss, they are doing something. So manipulation cannot be totally avoided. Even, a fundamental fund manager will stumble once in a way. I mean there’s no guarantees that just because I know that … I mean I’m not the company. The company is owned by someone.

Prashant: He’s finally the decision maker. The only data points I have is what he gives me. So there is a space for manipulation everywhere. In manipulated stocks, it’s much more visible for a single reason that it’s a much more low volume game.

Prashant: Manipulation doesn’t happen, as your volume goes up, it’s very tough to manipulate because there’s too many players, too many different thought processes that’s driving the market, supply demand kind of thing. So the higher your filter in terms of volume, the lower the probability that you will get caught in a stock that is manipulated and a pump and dump in way. So pump and dump happens, but if you are good enough filter, you should be able to take out 99% maybe. Even then, 1% may come through which is why portfolio diversification works. Basically we diversify to hope that when that 1% hits us, it doesn’t kill us.

Deepak: That’s true. That’s true. Like you said in Vakrangee, I guess, only 0.5% or 1.5% was your hit even if you got in right at the top, which you didn’t. You probably rode up the the wave and maybe saw a 400 grow to 800 and then come back to 400 in which case you lost. What you lost was notional from that peak, but it was only 2% of your portfolio even if you had picked it up at the peak.

Prashant: Exactly. I mean in the case of Vakrangee, that is what actually happened. I wrote down the whole write up and came down the whole way down because once the selling freezes started, there’s no way to exit for any normal investor. It’s impossible. A backtest will say that you would have exited, but in reality you know that there’s no way to exit it. So in that case actually, I saved myself. I had only a opportunity calls that I could’ve maybe doubled my money, which didn’t. Basically I got my money back, but even if I had been at the top, my pain would have been very, very limited because when Vakrangee happened, the market action was better kind of thing. So even though one stock was dragging me down, 29 orders, one actually going up, which means that for me it was a no brainer. Even today where Vakrangee would have been part and parcel of the portfolio.

Deepak: Interesting. So you know, these stocks like HEG or others, various the stock was at 4,000 and falls to 1000, do they give you time to exit? Do they?

Prashant: It all depends upon how your final phase has happened. As I said, I mean if you look at parabolic charts, it’s a waterfall when it comes down. So the waterfall is in the terms of … Indian markets, they don’t allow the stock to go below X percent, 5% 21% or whatever unless it’s a F&O stock. So, in a F&O stock generally very, very rarely do you have a parabolic rise and a fall. I mean once in a way, it has happened in the past. It’s not like it’s never happened. But they do give time. Momentum doesn’t exhaust itself. There’s no exhaustion peak at a one single ball that boss, if you miss that, you wouldn’t have been able to get out. Momentum exhausts generally overtime.

Prashant: It uses a some amount of timeframe for you to get out and then even after getting out, it’s not like it vertically falls. It actually smoothly keeps dripping down. It’s like a waterfall that is coming down the mountains. Maybe one waterfall will be there but it’s actually a series of small waterfalls that actually gives a investor because he looks at it and says, it’s one fall. By the time he realizes, it’s edge of the crevice kind of thing.

Deepak: Got it. In effect, if you look at the strategy, it’s more select stocks that are going up, diversify enough to be able to contain your losses because on the loss making front, you won’t lose much even if the stock crashes substantially, replace these stocks on a monthly basis and sounds easy enough. But obviously, as a practitioner you would have seen a lot more in terms of pitfalls, in terms of things to watch out for. What would you say, would somebody who’s trying to trade a momentum strategy have to watch out for?

Prashant: So, the question is how do you … It all comes back to again to square one wherein how are you going to build a momentum strategy? How you build your momentum strategy also defines your risk factors in a way. The pitfalls what we mentioned because if you are, for example not looking at volume. Looking at a significant volume stock being significantly liquid, you will get trapped in stocks that seem to have momentum. I mean that have rumped quite a bit. But actually just pumped up by small circle of operators. Finally when they all exiting, you don’t have a play date. So the risk is actually, because we are looking at price, that risk is supposed to be the company we go bust for that matter.

Prashant: But generally when you’re looking at a one year look back, stock has changed tremendously. When you look at momentum portfolio, it’s not like it says security portfolio. A lot of momentum portfolios, a momentum portfolio of today, for example, would have nearly 50% in large and mid cap. So when you’re 80% in large and mid cap for that matter. So when you’re looking at large cap and midcap, unless there’s a wholescale fraud in the Indian markets, or any market that you are trading, most of the time, most of the stocks that you’re trading on are pretty good which is why it’s important to have a foundation and understand your own behaviour negativity. Because what kills you is not the market but oneself because end of the day you have to … A stock may go up, go down kind of thing. Your behaviour finally drives whether you are able to keep it up.

Prashant:  The question is when you are in a drawdown, will you keep churning or will you say, “Boss, I mean maybe I should just hold onto the stock because the stock has fallen so much that it will somewhere rise because we start mixing more fundamentals. So it’s more behavioral. My opinion, as I said, the alpha is produced by behavior rather than anything else because once you are able to control your behavior, once you are able to control, say that, “Boss, I will go according to what the system says.” The biggest failure point is, in my opinion is not the system.

Prashant: It’s easy to build a robust system. It’s not very complicated because you are looking at very few points of interaction. It’s not like there is 18 variables that you have to check out and all have to match, all have to come in line kind of thing. This is just two, three, four variables that have to, clear them of their filters. One of them is a key variable. That’s price. That is it. It’s actually very easy, which is actually why people also are afraid because they think that only complexity works. Simplicity doesn’t work.

Deepak: Yeah, I guess it’s behavior. Like you said, the worst enemy is yourself and you’re always afraid to buy a stock at a new high. You’re always afraid to sell a stock when it’s fallen like five or 10% simply because your behavior says, if it’s fallen, it’ll go back up to a high or if I’m making a loss, let me hold onto a profit. I guess this is also why stocks, the trends continue because people are so skeptical until a point where they become so non skeptical that I guess the trend reverses and they’re still in that stock no matter what. So, they love it. That’s interesting. Obviously you’ve done back tests. You’ve done actual live money tests as well. We’ve got a premium portfolio running for a long time.

Deepak: We’ve got a momentum portfolio in PMS. The metrics are quite interesting from where you stand. So, what are the returns or results look like?

Prashant: All said and done, finally the return of any strategy, any portfolio is dependent upon the market. So, if you are going through a bad phase in a market, momentum, all value, all quality, nothing actually really works especially in diversified portfolios. If you take a better truckload on one stock and that has jumped up. I mean that may be. But again, the other side is that if you did the same and the stock actually cracked, then you have no way out as well because you’ve bought too much that you can’t even get out of that stock.

Prashant: Basically we are looking at achieving at least an 18% on a long term. I believe 18 to 24% is what is achievable. I mean 24% is on a peaker so which means that in a bull market, at a short time frame, you may. I mean at 2017 for example, 24% was very much easily achievable because you had across the board momentum and a very strong momentum. Momentum from stocks that doubled, tripled, quadrupled in a few months in that sense. Or take the dotcom bubble of 2000. Stocks went up like crazy. So when you are participating in that, the short term will look like fantastic numbers but on the longterm, I think you should actually expect 18 to 20 on a very long term basis kind of thing. And that is you face the draw downs which in my opinion, whatever I have tested is similar to Nifty.

Prashant: The reason I’m saying similar to Nifty, even in a multicap portfolio is because one of the things about momentum is the churn is actually beneficial for us in the short to medium term wherein at the top of the cycle, you all long all kinds of of bad stocks. Basically stocks that have gone. But as the stock trends continue to go down, you get out of those bad stocks, start getting into good stocks, like large cap stocks, which don’t go down as much.

Prashant: So you’re actually changing your portfolio structure as well. Even though your momentum philosophy remains the same, the portfolio structure changes from more of a small cap emphasis in the very strong bull trends to a mid to large cap in a decently flattish markets kind of thing. The current market, we are more oriented towards a largecap than towards a small cap.

Prashant: Small cap is a very, very small percentage because there’s literally nothing out there which is why you don’t face the same downside as a small cap as well. When a small cap index can fall 80%. This even, in a 2008 crash, even if you take a overall, longer this one, you didn’t go below 65% which is what Nifty did approximately.

Deepak: Even though it’s momentum, the downside roughly resembles the Nifty, the upside as an alpha. So you do as badly as the Nifty on downsides but probably a little bit better or more than a little bit better because Nifty is a long longterm. Returns have been like 12% odd and this is nearly 18 to 24 would be a fairly large number in comparison. I guess this has played out in foreign markets as well, where the returns on the upside for momentum strategies have been typically higher than any corresponding broad based index.

Prashant: Yeah, I mean there has been lot of testing, especially in European market and American market because they have the history kind of thing. You have very long history in terms of data for Dow Jones or even FTSE for that matter. So in board pressers, momentum actually has been able to hold on to its own on an extreme long term.

Prashant: Youre’ talking about 100 years and that outperformance of 100 years has to mean something. It cannot be just a figment of imagination. I mean in essence, a small timeframe, it has done well but on a longer term, it it hasn’t done well. Actually a lot of things that we believe in actually hasn’t worked. A low volatility, for example, we assume that low volatility means lower risk. Actually it has shown to be a higher risk at some junctures of time.

Prashant: I mean low volatility supposedly suddenly became high volatility kind of thing. I mean if you look at research outside India, and it has been huge. Momentum is that premium anomaly. I mean it’s an anomaly that actually persists. I mean the persistence is key because if there’s a strategy that doesn’t participate, there’s no point. A small cap index looks great in bull markets. But if you look at a long term, it has generated, if you risk adjusted, it’s generated as much as a large cap. So why take that kind of risk if you’re getting as good as large cap returns? So in that sense momentum, even after adjusting for the ris, you are getting a alpha.

Deepak: That’s brilliant. I think this is a great. This has been a great session, Prashant. Thanks a ton for explaining all of this to us and I’ve would also of course invite everyone to look at the Capitalmind premium articles on momentum.

Deepak: We’ve done a bunch of portfolios on momentum. We’ve got a 30 stock portfolio that’s currently running, which is in both Capitalmind premium and in the portfolio management service. One is a do it yourself model. One is a do it for me. DIFM and DIY is what we call it. So if you prefer to do to yourself, we have a small case that works, that rebalances once a month that you can look at and if you want us to do it for you, of course this would apply to people with larger amounts of capital. You can allocate part of your capital to us where we would allow it to participate in a momentum strategy on a regular basis.

Deepak: We of course, Prashant has been doing a lot of research on momentum constantly, tweaking the portfolio in terms of looking at various metrics and finding out how it can … It’s performed in various different situations. It’s performed in the past. It’s performed in terms of volumes, in terms of liquidity and I think it’s an enlightening exercise because this is not really speculation. It’s actually a factor based strategy. Thanks a ton, Prashant again for explaining all of this to us.

Prashant: Thanks, Deepak.

Deepak: And thanks all of you for listening. We will be back with more podcasts on this topic and others. The Capitalmind podcast always available to you. Please visit and for more information. Tweet me at deepakshenoy on Twitter. Prashanth is @Prashant_Krish and we are @Capitalmind_in. Thanks for all the love. Thank you.


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