0 Demystifying Momentum

Table of Contents
Why this paper ....................................................................................................................................1
Adaptive Momentum 5-Year Performance Tear sheet ...........................................................................2
The difference between Traditional & Quantitative Investing ................................................................3
Traditional Investing: Assembling a Mosaic ................................................................................................................. 3
Quantitative Investing: Distilling the Essence ............................................................................................................. 3
Why Traditional Investing is like Cooking, Quantitative Investing is like Baking. ........................................................... 5
Understanding Momentum Investing ...................................................................................................6
Globally Researched by academics and practitioners ................................................................................................ 6
Momentum in Indian markets ..................................................................................................................................... 8
So, it works, but why? ................................................................................................................................................. 8
Ten Battle-tested Real-World Momentum Investing Lessons ................................................................9
Assumes we know less ............................................................................................................................................... 9
Is wrong, a lot ........................................................................................................................................................... 10
Casts a wide net ....................................................................................................................................................... 10
Repeatable and scalable, given time ........................................................................................................................ 10
Can’t diagnose why it has not been working.............................................................................................................. 11
Works because it “stops working” ............................................................................................................................ 11
Cannot be timed with certainty ................................................................................................................................. 11
Does not beat the ‘Best’ fundamental Investors ........................................................................................................ 12
But outperforms the ‘Average’ Investor...................................................................................................................... 12
Momentum’s edge is not what people think .............................................................................................................. 12
Closing: Momentum, Humans, and Investing ..................................................................................... 13
Notes ................................................................................................................................................ 14
Know more: Get in touch ................................................................................................................... 15

Why this paper
The Adaptive Momentum Portfolio in our PMS,
Capitalmind Wealth, completed five years of
live operation on March 5, 2024, making it
India’s longest-running quantitative PMS
momentum strategy.
Five years is only a fraction of a typical
investing lifetime. On the other hand, five years
is an eternity in an age of widely available “1-
Year Top Performer” lists.
Traditional fundamental investment strategies
lend themselves to top-down macro
Commentary, detailed sectoral trends, and in-
depth company analysis for each portfolio
constituent to explain how and why they work.
Quantitative strategies like Adaptive
Momentum depend on statistically defined
factors. So, they tend to be less relatable.
We wrote this article for the non-finance
investor to understand, jargon-free, from our
experience managing a quantitative
momentum strategy with real capital.
One Rupee invested in the NSE500 on March 5,
2019, would be worth 2.35 nearly five years
later, a 135% increase. In Capitalmind Adaptive
Momentum, that rupee would be worth 3.53,
an increase of 253%. The NSE500, being an
index, assumes no costs, while the Adaptive
Momentum nav is not a theoretical model
portfolio and is net of actual trading costs, STT,
and fees.
Over 1,000 investors, including individuals,
families, and corporations, are invested in the
Capitalmind PMS Adaptive Momentum
portfolio. The investors with the highest IRRs
(effective rates of return) on their investments
have stayed invested through periods of
indifferent performance and continue to add to
their investments.
That kind of conviction and patience comes
from a conceptual and practical understanding
of the underlying investment philosophy.
1 DEMYSTIFYING MOMENTUM
Think of it like owning an electric car. You don’t
need to be able to take it apart and rebuild it.
But understanding the essential systems and
how they work together tells you how reliably
you will reach your destination.
The “essential systems” of Momentum
Investing
• How quantitative investment strategies
differ from traditional fundamental
stock-picking approaches
• The principles underlying Momentum
Investing, its strengths and weaknesses
• The likelihood that it’ll sustain and the
things to keep in mind
This should give any investor, existing or
prospective, a foundational understanding of
Momentum investing and whether it makes
sense in their investment portfolio.
If anything in the following pages sounds
“technical” and conveys false sophistication, it
is unintended and a failure on our part. Where
applicable, you’ll find numbered links to
footnotes for further references if you’re so
inclined. Feel free to contact us for
clarifications at the coordinates mentioned at
the end.
What this article is not: A how-to manual of
Momentum Investing because there are plenty
of those, and momentum investing is really not
that complicated1.
First, a look at the performance of Capitalmind
Adaptive Momentum in the five years since
inception.
Adaptive Momentum 5-Year
One-Year Rolling Returns
Performance Tear sheet
The charts in this section show the
performance of Capitalmind Adaptive
Momentum since its inception in March 2019
alongside that of the Nifty 50 and Nifty 500
benchmark indices. The benchmark indices are
Total Return, i.e. they include dividends.
Adaptive Momentum numbers take fees,
transaction costs and STT into account.

₹100 invested five years ago

5th March 2019 to 4th March 2024

Percentage Time Leading on 1-year Rolling

Basis

Five-Year Performance Summary

Cumulative Equity Curve

Adaptive Momentum’s five-year tenure has

seen wildly varying market conditions. It has
Calendar Year Returns delivered strong risk-adjusted returns, albeit
not without significant periods of trailing the
benchmarks on a one-year rolling basis.

Headline numbers out of the way, the rest of

this short report will examine the underlying
differences between Adaptive Momentum and
traditional styles, their respective strengths
and weaknesses, and hard-won real-world
lessons.

2 DEMYSTIFYING MOMENTUM
The difference between Traditional &
Quantitative Investing
“If you want to
understand the whole,
you must first look at the
pieces.” - Aristotle
We’ll start with the smallest unit of
fundamental investing, i.e., company analysis
and valuation, as the jumping-off point to make
sense of how Quantitative or Rule-based
investing differs from traditional fundamental
investing.
Traditional Investing: Assembling a
Mosaic
The graphic below is the typical framework
used to analyse companies fundamentally.
The graphic broadly covers the significant
inputs to determine that present value2.
That fair value is driven by its:
• External Environment: Capital Markets and
Competition in its space.
• Internal Capabilities: Quality of
Management and the assets it owns and
can build.
• Moat (or Sustainable Competitive
Advantage3): Capabilities that allow the
company to thrive and others cannot easily
replicate.
3 DEMYSTIFYING MOMENTUM
The elements of that diagram combine to help
us determine an (approximate) fair value for
any company.
Investing, in a nutshell, is about finding
companies that the market is currently valuing
at less than “fair” value. The implicit
assumption is that the market will eventually
recognise this higher fair value, enabling your
returns.
Every fundamental investing style boils down to
this.
Great investors build their
reputation on being “more
right” than the rest in
assembling the mosaic.
Quantitative Investing: Distilling the
Essence
If fundamental investing is about synthesising
multiple inputs, like assembling a jigsaw
puzzle, quantitative investing is about distilling
the essence.
Most quantitative approaches are attempts at
reducing hundreds, even thousands, of inputs
that potentially drive returns down to a small
but meaningful and repeatable set.
Quantitative Investing starts with an
investment thesis, a “what if” set of rules
applied consistently to pick portfolios. Buying
stocks with higher relative returns, i.e. broadly
called Momentum, is only one such set of
rules. Other rules could be about buying the
highest Return on Capital companies (Quality),
lowest Price-Earnings companies (Value),
lowest volatility companies or variations and
combinations of those.
To count on a set of rules to do as well or better
than a painstakingly chosen portfolio, based on
deep fundamental analysis, the rules need to:
• have an enduring underlying economic
rationale and
 • be rigorously validated by historical
data4
Neither of the above two criteria alone is
sufficient to build a quantitative investment
strategy.
“In God we trust. All
others must bring data.”
- W. Edwards Deming
(Pioneering Statistician)
Buying stocks at lows
“Buy low, Sell high”—the most unarguable
investing truism.
Let’s consider a quantitative approach that
buys stocks beaten down in price.
We buy 20 stocks from the top 100 by market
cap, closest to their 52-week lows, and hold
them for a month. Let’s say we have done this
for over 16 years, from 2007 to 2024. Before
reading further, what would such a strategy do
compared to buying and holding the Nifty?
Logic suggests this should do well, given we’d
be buying stocks relatively cheaper than their
historical prices. The chart says we’d be wrong.
Applying a “buy stocks at lows” strategy would
have returned just over half the Nifty. Not a
great way to invest.
4 DEMYSTIFYING MOMENTUM
What if we did the opposite? Buy stocks closest
to their 52-week highs and hold for a month.
Everything else stays the same.
Buying a stock at 52-week highs is better than
buying at its 52-week low strategy by quite a
margin. However, even that fails to do better
than just buying the index.
You’re thinking, maybe buying at lows works if
we held those stocks for longer, like a quarter
or even a year. We tried all those variations of a
“buy low” strategy, and you’d still do better just
buying and holding the index.
In markets, what we think
should work and what
does are often different.
Quantitative investing
looks at the world as it is,
not as it should be.
Bangladesh Butter Production and the S&P
“Torture the data enough,
and it will confess to
anything.”
– Ronald H. Coase
(Economist)
In 1993, two analysts at First Quadrant
published a paper that said that Bangladesh’s
butter production was an almost perfect
predictor of the S&P 500 index.
Source: Forbes (2012)
In statistical terms, an R-squared5 of 0.99,
along with a low p-value6, can be interpreted as
there is a proven relationship7 between the
variables.
The two analysts successfully highlighted the
absurdity of relying only on statistical
techniques bereft of the economic rationale for
investment decisions.
One of them, David Leinweber, wrote in a
Forbes article8 in 2012 that twenty years later,
he was still getting calls from investors asking
for data on Bangladesh butter production.
Correlation is not
necessarily causation.
Sound judgment to know
the difference is
essential.
Writing about the pitfalls and abuse of
backtests9 to make grand claims would be an
article by itself, so we’ll leave it at; when it
comes to quantitative investing, you will never
see a bad backtest.
The flowchart below summarises the process
we’ve evolved into at Capitalmind when going
from a “what if” hypothesis to deploying real
money on a quantitative strategy.
5 DEMYSTIFYING MOMENTUM
The objective of this gated process is not to be
seduced by shiny new objects or noise
pretending to be signal. Most ideas that sound
promising in theory do not make it through
initial exploration. Several look promising but
don’t survive further validation. Many that
survive validation show real-world constraints.
A small set makes it all the way to justify
deploying capital.
Sound quantitative
investing relies on a
robust, replicable process
validated by, but not
tailored to the past.
Why Traditional Investing is like Cooking,
Quantitative Investing is like Baking.
Cooking is an art involving creative
combinations of ingredients. A chef uses
intuition and experience to create a unique
dish. The dish itself can be slightly different
each time they make it.
Baking is a precise science involving following a
series of precise tested steps. A tiny variation
can drastically affect the final product’s taste
and texture. A baker’s creativity is applied to
developing and testing those steps to create
something unique.
 Momentum Investing, in a nutshell, is a
strategy that picks stocks that have had higher
relative returns over the recent past and holds
them for a defined period. Historical and live
Traditional Quantitative performance reviews have shown Momentum
Investing Investing investing outperforms buying and holding the
Inputs Wide: Deep and market index.
Qualitative Narrow:
(management Extensive How can such a simplistic strategy offer long-
quality) and amount of term outperformance versus the market?
quantitative historical data
Process Based on Objective Momentum is one of the most well-explored
interpretation: decisions: Only investing phenomena in global finance going
Same works if applied back several decades.
information consistently
can result in
contrasting Globally Researched by academics and
decisions practitioners
Strengths Deeper Reduces
understanding emotional bias, The starting point to explore Momentum
of investments more efficient investing is a 1993 paper10 by two finance
can identify and scalable, professors at UCLA, Jegadeesh Narasimhan
undervalued diversification and Sheridan Titman.
opportunities is built-in
that others They tested various portfolios built using a “J-
might miss month / K-month” strategy where they picked
Weak- Time- Can overlook stocks based on past J-month returns and held
nesses consuming, nuances that them for K months after portfolio formation. J
susceptible to don’t fit the and K varied from 3 to 12 months in three-
biases, skill model. month increments. The research tested every
and expertise- Dependent on combination.
dependent. effectiveness of
chosen factors Their finding was that all combinations of past
Risk Managed Managed returns and holding periods, barring one,
through systematically outperformed a basic buy-and-hold strategy
discretion net of costs.

Momentum Investing is one such type of

Quantitative investing.
“Strategies which buy
Understanding Momentum Investing stocks that have
performed well in the past
“A stock that has been generate significant
moving up strongly for a positive returns over 3- to
while is likely to continue 12-month holding
doing so a little bit longer. periods.”
That’s the core idea. The
rest is details” – Andreas
Clenow (Stocks on the Move) In 199911, Tobias Moskowitz of the Chicago
Graduate School of Business and Mark
6 DEMYSTIFYING MOMENTUM
Grinblatt of Anderson School of Business,
UCLA, examined the industry component in a
stock’s Momentum on 32 years of data from
1963 to 1995.
“Industry momentum
investment strategies,
which buy stocks from
past winning industries
and sell stocks from past
losing industries, appear
highly profitable, even
after controlling for size…”
Another paper12 by Tobias Moskowitz, Yao Hua
Ooi, and Lasse Hej Pedersen expanded the
scope of examining Momentum to over 25
years of data on five dozen diverse financial
instruments, including country equity indices,
currencies, commodities, and sovereign
bonds.
“We document significant
“time series momentum”
in equity index, currency,
commodity, and bond
futures for each of the 58
liquid instruments we
consider. We find
persistence in returns for
1 to 12 months that
partially reverses over
longer horizons,
consistent with sentiment
theories of initial under-
reaction and delayed
over-reaction. A
diversified portfolio of
time series momentum
strategies across all asset
classes delivers
7 DEMYSTIFYING MOMENTUM
substantial abnormal
returns with little
exposure to standard
asset pricing factors and
performs best during
extreme markets.”
A 2017 paper13, “A century of evidence on
trend-following investing”, by Brian Hurst, Yao
Hua Ooi and Lasse Pedersen, considered
monthly returns for 67 markets across four
major asset classes: 29 commodities, 11
equity indices, 15 bond markets, and twelve
currency pairs.
They constructed equal-weight combinations
of 1-month, 3-month, and 12-month time-
series momentum strategies from Jan 1880 to
Dec 2016, 136 years, rebalanced monthly.
“Even assuming a 2-and-
20 fee model (2% of AUM
as fixed fee and 20% of
gains), a momentum-
based strategy
outperformed net of costs
in every decade from
1880 to 2016, with a
minimum
outperformance of 2.6%
from 1880 to 1889 and a
maximum of 15.1% from
1970 to 1979.”
A comprehensive review titled ‘Fact, Fiction
and Momentum Investing’14 by Cliff Asness,
Andrea Frazzini, Ronen Israel, and Tobias
Moskowitz of AQR Capital made this telling
assertion:

“The existence of
Momentum is a well-
established empirical
fact. The return premium
is evident in 212 years
(yes, this is not a typo, two
hundred and twelve years
of data, from 1801 to
2012) of US equity data,
dating back to the
Victorian age in UK Equity
data, in more than 20
years of out-of-sample
evidence from its original
discovery, in 40 other
countries, and more than
a dozen other asset
classes.”
Finally, the most telling validation of
Momentum as an investment strategy came
from Dr. Eugene Fama, Robert R. McCormick
Distinguished Service Professor of Finance at
the University of Chicago Booth School of
Business. His biography page on the Chicago
Booth website refers to him as the “father of
modern finance”. He is best known for his work
on the Efficient Market Hypothesis (EMH), for
which he and his co-authors were awarded the
Nobel Prize for Economic Sciences.
EMH, in a nutshell, says capital markets are
efficient in processing information. Stock
prices at any time are based on correctly
evaluating all available information. i.e. In an
efficient market, prices fully reflect available
information. And if prices reflect all information
at any time, there is no way to profit from
identifying mispricing.
In 2008, Prof. Fama published a paper titled
“Dissecting Anomalies15”, which explored
returns from specific investment strategies that
did not conform to the Efficient Market
Hypothesis. In this paper, he and his co-author
8 DEMYSTIFYING MOMENTUM
Kenneth R French, based on an analysis of 42
years of data from 1963 to 2005, concluded:
“Anomalous returns
associated with net stock
issues, accruals, and
momentum are
pervasive.”
Years later, he referred to Momentum as “the
premier anomaly” that persists even as others
fell away.
Momentum in Indian markets
In 2019, we did our study into Indian markets16.
It did not take a stretch to see that Momentum
has worked well in India. We examined a few
variants of a momentum investing strategy,
Naive Momentum, along with volatility-
adjusted versions. All momentum portfolios
comfortably outperformed a Nifty Buy-and-
Hold strategy. Adding volatility-adjusted Sharpe
return ratios helped improve the risk-return
profile of the strategy by reducing the impact of
sharp market drawdowns on portfolio
performance.
Momentum has historically worked to deliver
excess returns in India.
So, it works, but why?
Researchers have proposed several
behavioural explanations for why a strategy
that buys past winners and sells past losers
outperforms the market consistently over
centuries of data across asset classes and
countries.
Underreaction (or Anchoring Bias or the
Frog-in-the-Pan hypothesis)17: Investors are
inattentive to information arriving continuously
in small amounts, so frequent gradual changes
attract less attention than infrequent dramatic
changes. A company with consistently but
gradually improving performance would not
attract significant attention. A momentum
strategy could enter and ride the gradual price
rise.
Disposition Effect18: A natural inclination to
sell winners but hold on to losers to avoid
losses. Consistent selling from existing
investors acts as a brake on the stock price,
increasing the price gradually and, therefore,
allowing a momentum strategy to enter.
resurgence in the face of major geopolitical
conflicts. Some pre-existing beliefs about
momentum investing were reinforced, others
were challenged leading to modifications. And
more ideas fuelled the need for further
exploration. What follow are our hard-won
lessons from the last five years.
Assumes we know less
Successful fundamental investors make
money by knowing something about a
company that the people they are buying from
or selling to do not. That “something” could be
one or more of many things. Understanding the
sector’s tailwinds, potential new products in
the pipeline, and new management about
changing capital allocation policy. Each boils
down to a different and more correct
interpretation of the future.

Momentum investing is the opposite. It

Cognitive Dissonance19: News that assumes that, given any company, a set of
contradicts investor sentiments causes investors knows better and relies on buying
cognitive dissonance, which tends to get after them.
ignored or disbelieved, thus slowing its
diffusion into stock prices. Therefore, losers
keep getting underpriced while winners keep
getting overpriced, sustaining their
Momentum.

But then, that’s the theory. And nothing quite

replaces lived experience.

Ten Battle-tested Real-World

Momentum Investing Lessons

Experience is one thing you

can’t get for nothing.

Oscar Wilde

From under ₹5 Cr in 2019, the Capitalmind

Adaptive Momentum portfolio has grown to
over ₹750 Cr in assets under management. A
few things happened along the way. An
indifferent 2019, the pandemic crash and its
aftermath in 2020-21, the inflation/rates-led
reversion in 2022 and the 2023 market
9 DEMYSTIFYING MOMENTUM
It logically follows that a momentum strategy from old-school commodity manufacturers to
never buys at the bottom. Many investors find it new-age internet companies and anywhere in
hard to buy a stock that is up significantly. between.

Is wrong, a lot

If we define the “winner ratio” as the

percentage of stocks that result in positive
returns during their tenure in the portfolio, then
Momentum investing barely does 50.

Here’s why that might be. Momentum’s

approach is to buy trending stocks. Since a
trend is a fad that endures, an approach that
looks to get in early sometimes buys fads that
die out.

In the long run, half the stocks exit the portfolio

lower than they entered (the cluster of red dots
in the above chart are live data for Adaptive
Momentum). If you’re used to getting most of
your questions right on exams at school, this
can be a physically painful experience.
The ability to move to different parts of the
market, be it market caps, industries, or
companies long ignored by the market, makes
Momentum an agile approach.

The returns in Momentum come from having a
few big winners and not losing too much on the
losers. Even knowing this in advance doesn’t
make it easy to live through.
Casts a wide net
Every stock is not a great investment, but a
great investment can come from any stock.
Successful fundamental investors sensibly
stick within a circle of competence. Since
Momentum has none, it relies on ideas from
the thousands of different circles of
competence. Its biggest winners could range
Repeatable and scalable, given time
Successful authors face the highest pressure
when following up on a successful book.
Similarly, the traditional investor who sees his
portfolio go through a purple patch followed by
a lean stretch needs to hang tight or rejig their
portfolio to reflect the new reality. There is no
easy answer.
Momentum, as a Quantitative approach, relies
on staying true to itself by applying a proven
strategy that yields outcomes in the long term.

10 DEMYSTIFYING MOMENTUM
Short-term outcomes are noisy. Long-term
outcomes reflect the quality of the process.

Cannot diagnose why it has not been

working
A fundamental investor can attribute their
portfolio struggles to their chosen set of stocks
When a fundamentally picked stock, like a being unpopular and will themselves to be
defence equipment company, does not deliver
patient. A momentum, or any Quantitative
the expected returns, there is usually an
investor, cannot specifically explain why it
identifiable cause. The orders didn’t come in as
hasn’t worked for a while, except knowing it
expected because the expected spending
doesn’t occasionally work, often for
didn’t materialise. Or the orders came, but the uncomfortably long stretches.
company struggled to deliver due to quality
issues, or maybe they delivered but couldn’t
Any strategy with no detractors will stop
convert receivables to cash. Perhaps they did
working because then, who would investors
all the above, but the market had priced even
buy from?
higher expectations, leading to a correction.

Momentum strategies go nowhere for periods. Cannot be timed with certainty

For example, in 2018, or for most of 2022. Only
in retrospect can we see that most stocks went This one is the hardest to accept for even long-
nowhere during those periods. Not being able time practitioners of Momentum investing, us
to pinpoint specific reasons can be included, let alone investors.
unsatisfying for a lot of investors.
At Capitalmind, we integrated some indicators
Works because it “stops working” that work to move into cash when broad market
corrections unfold, like the pandemic crash.
But knowing the specific periods when
“My portfolio has now been trailing the
Momentum will not work, so far, hasn’t been
benchmark for 12/18/24 months. It has solved. Conversely, you also can’t forecast
stopped working.” – Momentum investors, just
when it will start working again.
before they throw in the towel
Backtests and live performance indicate
In its 60-month tenure, Adaptive Momentum
Momentum underperforms the benchmark
has trailed the benchmark nearly a third of the
roughly 1/3rd of the time on a 1-year basis.
time, with one continuous stretch lasting 18
When the holding period increases to three and
months. Of those 18 months, for 12 months, five years, the chances of decent performance
Adaptive Momentum showed a negative 1-year
increase significantly.
rolling return. The kicker, this behaviour is
almost identical to Momentum backtests.

11 DEMYSTIFYING MOMENTUM

The only workaround, therefore, is to stay
consistently allocated.
Does not beat the ‘Best’ fundamental
Investors
The best investors are contrarians in their
consistent ability to buy the stocks where the
gap between the market’s assessment of the
company’s earning trajectory diverges widely
from their own. Consistent is the keyword.
Since Momentum assumes we know less, by
definition, it will only buy stocks after the best
fundamental investors.
This means it is not for investors who only
accept having “beaten” all other investors as a
satisfactory outcome.
But outperforms the ‘Average’ Investor
The average fundamental investor believes in a
chosen set of stocks as the holy grail of returns.
They identify with their companies and
consider all stocks not on their favoured list as
inferior investments.
Since it casts a wide net, Momentum Investing
has no tribal affiliation with any set of stocks,
sector, or theme. The Momentum investor is
perfectly comfortable changing her mind, so it
does better than the average investor.
12
Momentum’s edge is not what people
think
Three underlying edges account for all superior
returns, i.e. returns greater than the major
benchmark index:
Informational Edge: Having more information
than other investors before they do. This
includes the illicit kind, where a small set of
investors know before the rest. Thanks to
capital market regulations, this kind has largely
disappeared. The other is doing legwork by
visiting channel partners, vendors, customers,
and competitors to determine a company’s
trajectory before it becomes common
knowledge.
Analytical Edge: The ability to better analyse
available information. This could involve
enhanced skills in assessing markets and
securities, proprietary models, and even better
workflows.
Behavioural Edge: Capitalises on common
investor biases and limitations in decision-
making under certainty. It involves structuring a
process that avoids emotional biases and
consistency pitfalls.
Momentum investors like to believe their edge
is analytical. Resting on the sophistication of
DEMYSTIFYING MOMENTUM
the model used to score and rank stocks, the
frequency at which they rebalance, whether
they follow an overlapping portfolio, the
position-sizing mechanism and rules that
govern moving to cash. Getting those things
right is important, but only up to a point.
The Momentum Investor’s edge is primarily
behavioural and, to a lesser extent, analytical.
The hallmark of that edge is the ability to follow
a consistent process without discretionary
overrides and stick with it, even when it “feels”
painful.
Closing: Momentum, Humans, and
Investing
Investment approaches with a solid recent run
tend to get the most interest from new
investors, often without fully appreciating the
nuances. When the inevitable
underperformance comes, that initial
excitement vaporises, and reallocation
decisions get made, only for the cycle to repeat
with the next “can’t miss” theme.
The question then is, what are the chances that
the collective behaviour that has enabled
momentum investing the world over for over
two centuries and in the relatively nascent
Indian market, will cease to exist over the next
decade.
• When choosing a hotel for your first trip
to a city, we’ll pick a familiar chain over
an unknown standalone hotel.
There are logical reasons why we make choices
this way. Social Proof is the idea of relying on
the wisdom of crowds to filter out undesirable
options. The availability heuristic says that
popular things that come to mind quickly are
reliable. The bandwagon effect says we’re more
comfortable climbing aboard a trend when it is
widespread.
These tendencies of human behaviour are
time-tested. Is it surprising that they extend to
investing?
Momentum is not a silver bullet strategy
(nothing is) that will magically only buy stocks
that go up or that presciently avoid every kind
of portfolio decline (because then it’d be more
accurately called the Madoff strategy20). It’s
core strength is in offering a consistent,
repeatable way of investing that, however
unintuitively, has stood the test of time.
Investing in Momentum is
easy. Staying invested in
Momentum is harder. Plan
accordingly.

• If you’ve walked down a street in an

unfamiliar town looking for a meal,
chances are you picked the crowded
place over the place with empty tables.
• When deciding between two online
sellers for identical-looking products,
we pick the one with higher ratings and a
significantly higher number of reviews.
• Social media algorithms surface the
most-watched videos because those Get in touch with any questions or comments. I
are most likely to get the most am on Twitter/X @CalmInvestor, email
engagement. anoop@capitalmind.in. For some of the
• We are more likely to sign and repost an specifics about Capitalmind Adaptive
online petition with thousands of Momentum, click on bit.ly/3wrp7os. To
signatures over one with a handful. schedule a call with a Capitalmind Client
Advisor: bit.ly/3SOqLYP

13 DEMYSTIFYING MOMENTUM
Notes themselves and the economic indicator in your
pants
1
Instead of getting lost in a maze of can’t-miss
momentum webinars and strategies, we suggest 9
‘Backtesting Portfolios’ presentation by Prof.
referring to Quantitative Momentum by Wes Gray Daniel Palomar of HKUST
and Jack Vogel.
References: Momentum in Global markets and
2
The topic of valuing companies is extensive and India
the subject of several post-graduate level courses
in Finance. Some of the most popular references 10
Jegadees Narasimhan, Sheridan Titman, Returns
are ‘Security Analysis’ by Benjamin Graham and to buying winners and selling losers: Implications
David Dodd, ‘Valuation: Measuring and Managing for stock market efficiency (1993)
the value of companies’ by McKinsey & Co., and
‘Damodaran on Valuation’ by Prof. Aswath 11
Tobias Moskowitz, Mark Grinblatt, Do Industries
Damodaran. Explain Momentum? (1999)
3
The term was coined by Michael Porter, in his book Yao Hua Ooi, Lasse Heje Pedersen, Tobias
12

‘Competitive Strategy: Techniques for analysing
industries and competitors’. Capabilities can be
physical, like efficient manufacturing plants and
logistics networks, or intangible, like a reputation
for great customer service, brands, intellectual
property or even access to cheap capital.
4
The five tests of a viable quantitative investment
thesis: In their book “Your Complete Guide to
Moskowitz, Time Series Momentum (2012)
13
Brian Hurst, Tao Hua Ooi, Lasse Heje Pedersen, A
century of trend-following investing (2017)
14
Cliff Asness, Andrea Frazzini, Tobias Moskowitz,
Fact, Fiction and Momentum Investing (2014)
Eugene Fama, Kenneth French, Dissecting
15

Factor-Based Investing”, Andrew Berkin and Larry Anomalies (2008)

Swedroe list five conditions a quantitative factor
should meet. 16
Capitalmind, Does Momentum Investing Work in
Indian Equities? (2019)

References: Behavioural reasons why Momentum

works

17
Zhi Da, Umit G. Gurun, Mitch Warachka, Frog in
the Pan: Continuous Information and Momentum,
The Review of Financial Studies, Volume 27, Issue
Applying these criteria filters out a lot of 7, July 2014, Pages 2171–2218
prospective “can’t lose” investment strategies
when you see them work for short periods or on a 18
Mark Grinblatt, Bing Han, Prospect theory, Mental
narrow universe of stocks. Accounting and Momentum, Journal of Financial
Economics, Volume 78, 2005
5
R-squared: An informal explanation: How to 19
Antoniou, C., Doukas, J., & Subrahmanyam, A.
interpret R-squared in regression analysis, A more (2013). Cognitive Dissonance, Sentiment, and
formal one by PennState Eberly College of Science: Momentum. Journal of Financial and Quantitative
The Coefficient of Determination, r-squared Analysis, 48(1), 245-275.
doi:10.1017/S0022109012000592
6
p-value: Pubmed Central - What the p-value really
tells us 20
Bernie Madoff: Who he was, how his Ponzi
scheme worked
7
Statistical significance: Easy-to-understand
article by mailchimp: A Business Owner’s guide to
Understanding statistical significance <End of Notes>
8
The 2012 Forbes article by David Leinweber:
Stupid Data Miner Tricks: How Quants fool

14 DEMYSTIFYING MOMENTUM
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15 DEMYSTIFYING MOMENTUM