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Liberty 2-4 changing call signs? Wait and see.


The Capitalmind Momentum July 2022 factsheet & apologies in advance to those who don’t like the Hollywood reference in the title of this post

July 2022 portfolio update

July 2022 was the 2nd best July since 1999 for the index, up 8.9%. Quite the comeback after five down months out of six in 2022. The Nifty is now almost flat since the start of the year. The broader set of stocks still has some catching up to do. CM Momentum had a decent month, up 5% in July. More importantly, we went from being almost half in cash to over 80% equities by the end of the month as pockets of strength emerged.

The chart shows Capitalmind Momentum returns versus the NIFTY 50 and the CNX 500 over the last 1 / 3 / 6 months and one year.


The year-to-date chart still looks ugly, but at least now above where it fell in May.

Incredibly, the Nifty has almost recovered to where it started in 2022. The Next50, after being battered in June, is now only down 2.3% YTD. Just another reminder of how formidable an adversary the index is for active investors.

Capitalmind Premium Momentum Portfolio Performance summary since inception

The chart below shows the cumulative return chart since inception. i.e. What ₹100 invested on day 1 in Jan 2019 be worth it at the end of June 2022.

The chart shows performance (annualised returns, annualised volatility, and maximum drawdown from peak) since inception in January 2019.

Reading this chart: Annualised Returns, higher the better (obviously), volatility: lower the better, and Maximum Drawdown: measured as falls from the previous peak, lesser the better, i.e. the smallest negative value, the best possible value is zero, only possible with Fixed Deposits.

The Momentum portfolio tries to outperform the NIFTY while (hopefully) suffering lower drawdowns in deep corrections. The smallcase version of the portfolio has been live since Jan 2019; it still comfortably outpaces the benchmarks with lower volatility.

How about on a one-year rolling returns basis?

The chart below shows 1-year rolling returns, i.e. the 1-year returns as of any given date.

On a one-year basis, the CM Momentum portfolio is a distance behind the index. This hasn’t been the case for most of its short 3.5-year live history, but two things to consider when we look at historical one-year rolling returns, including backtested plus live data spanning 15+ years:

  • On a 1-year rolling returns basis, CM Momentum has trailed the index over 1/3rd of the time, sometimes by quite a bit
  • On average, the margin of underperformance (i.e. the magnitude by which it has trailed) has been less than that of outperformance (the extent by which it has led)

In other words, it trails the index but for less of the time and by less than the margin by which it leads in good times.

If we believe both these points will persist into the future, momentum will come out ahead over the long term.

What next

Belief: not sufficient but necessary

The phrase “If we believe” in that last line of the previous section is not accidental. Investing, unlike Physics, is not deterministic. If you drop a ball from a fixed height, it will accelerate to a speed we can calculate in advance. And we’ll get the same outcome no matter how many times we repeat the experiment.

In January 2006, NASA launched “New Horizons”, the spacecraft meant to travel three billion miles to explore Pluto, the most distant celestial body in our solar system. It reached its destination nine-and-a-half years later in July 2015. And it did so within 72 seconds of the time they estimated in 2006—seventy-two seconds off after travelling three billion miles over nine and a half years.

Financial forecasts and models, open sourced or otherwise, with 137 input parameters, cash flow projections down to four decimals and a stock price estimate for 2026 might look deceptively similar to what went into the New Horizons estimate.

But ask yourself why Google Maps gets arrival times wrong on 20-minute road trips. Because there are people involved. People introduce uncertainty. And there are lots of those involved in determining outcomes for businesses; customers, suppliers, employees, competitors, regulators and more. And that’s before you even get to market participants.

If investing were like Physics, then the “best” investment strategy and investors who apply them would always outperform. It follows there would be no reason for money to be invested in anything else. Ergo a set of stocks fitting that “best” strategy would go to infinity because buying them would always lead to superior results, conversely, everything else would go to zero because buying them would always lead to inferior returns. Of course, we’re assuming there are no investors who intentionally want to trail the index.

You would argue, “Aha, what if only some folks knew that best strategy?”. But then, over time, it would become apparent that “here’s a strategy that always outperforms”, which would attract all available capital resulting in the closest thing to an infinity-zero outcome for the stocks involved.

If no “best” investing strategies exist, logically, any investing strategy will inevitably trail the index for periods. Whether it’s value stocks that trailed for 10+ years, quality businesses, turnaround stories, or industry disruptors. Any time your chosen investment strategy trails the index, it could mean one of two things; it’ll continue doing so because it wasn’t a very good investment philosophy, to begin with, and you should exit, or it’ll eventually come back and do better for you than the index.

What are my beliefs? What do I believe in?

Two questions any investor needs to answer for themselves, ideally before they invest.

Looking at August

July saw a broad-based resurgence for stocks across the board. But since most investors are probably tending to their bruises from the first six months of 2022, there are a healthy number of references to bouncing dead cats. More people might believe markets have bottomed if August goes by without carnage.

We have seen some, just not dramatic improvement in strength overall across the board. Stocks halted their continued slide, and certain pockets of relative strength emerged. We deployed more than half the available cash into stocks, many in the industrial sector.

In case you didn’t notice, a lot of this is another way of saying, “we think stocks will go up unless they go down.”

If we entered July ducking and weaving, we exit July starting to throw a few jabs but still hurting from the pounding from the year’s first half.

The action over the last week or so could be called rousing, even euphoric.

Hence the unlikely reference to Liberty 2-4 from the climactic scene of the 1997 Harrison Ford action thriller: Air Force One. Corny as hell, but also fun, hence the pre-emptive apology. Just think of the president in this clip as your favourite equity investment philosophy. 😄

August will tell us if the president is safely aboard and if it’s time for Liberty 2-4 to change call signs i.e. that maybe, just maybe, it’s time for equities and momentum to shine.

Stay sharp.

Capitalmind Momentum smallcase by Capitalmind

Further Reading:

All Past Momentum Factsheets: Capitalmind Momentum Factsheets

Frequently asked questions about the Capitalmind Momentum Portfolio


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