Momentum Investing: The Land You Wish Your Grandparents Had Bought

Every investor’s journey is unique, with their own objectives and risk appetites. That’s why markets offer a buffet of strategies to cater to everyone’s taste. But let’s be honest: no matter how diverse our goals are, one thing unites us all nobody likes losing money.

In the charts above, I’ve compared broader market indices like Nifty 50, Nifty 200, and Nifty 500, representing blue-chip, large-mid, and the broadest market segments with momentum strategies represented by the Nifty 200 Momentum 30 and Nifty 500 Momentum 50 indices.

We’ve all had this thought at some point:

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Let’s unpack the numbers and lessons momentum strategies have taught us over the past decade:

Momentum’s Decade in Review

Momentum strategies, driven by the behavioral tendencies of investors to chase winners, have outperformed their base universes (Nifty 200 and Nifty 500) 7 out of the last 10 years. The Nifty 200 Momentum 30 has delivered an impressive CAGR of 17.62%, while the Nifty 500 Momentum 50 has clocked 18.50% CAGR, far exceeding their base indices.

In 2024, momentum stood tall as one of the best-performing factors, supported by the strong performance of small and mid-cap stocks. Refer to the graph above for yearly excess returns of these momentum strategies over their respective base universes.

The Psychology of Momentum

Momentum is not just about numbers—it’s about investor behavior. As Sir John Templeton famously said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” Momentum thrives when optimism grows and past winners attract more capital.

However, it’s important to remember that factors are cyclical. Momentum strategies tend to underperform during market downturns or sharp reversals, as seen in years like 2018 and 2022. They require patience and conviction to endure these phases of underperformance, knowing that the tide will eventually turn. After all, “The stock market is a device for transferring money from the impatient to the patient.” (Warren Buffett)

Key Takeaways

1. Outperformance Comes with Volatility: Momentum indices like Nifty 500 Momentum 50 deliver higher returns but come with higher volatility (daily volatility: 20.61%) and sharp drawdowns (e.g., -39.37% during tough times).
2. 2024 Insights: Large caps lagged small and mid-caps in 2024, and this was reflected in momentum indices:
3. The Real Question: Are we ready to invest in momentum today, knowing the risks and rewards? As with that land outside the city, it’s easy to look back and say, “We should have bought it.” But it’s never easy to seize opportunities in the present when the future feels uncertain.

A Practical Reflection

For those considering momentum strategies, it’s essential to ask: Does this align with my investment horizon and risk tolerance? Momentum might not work every year, but for those willing to endure the bumps, the long-term rewards could be worth it.

What do you think about momentum strategies? Have they been part of your investment journey? Or are you holding out for the next big "land" of opportunity?

Note: The Nifty 200 Momentum 30 Index (launched August 25, 2020) and the Nifty 500 Momentum 50 Index (launched June 4, 2024) are recent introductions. The performance numbers presented are based on backtested data and reflect theoretical outcomes, not actual returns achieved by investors prior to the indices' launch.

Disclaimer: These are my personal views and not investment advice or a promotion of any strategy. Please consult a financial advisor before making investment decisions.