How Index investing feeds itself.
The “Magnificent Seven,” comprising Apple, Amazon, Nvidia, and other tech giants, dominate the S&P 500, raising concerns about overvaluation. But are these worries justified? This article explores the phenomenon of index investing and how momentum strategies can navigate this crowded trade.
The Power of Index Funds: Index funds, passively tracking major indices like the S&P 500, are increasingly popular. Their market cap-weighted allocation leads to more money flowing into already large companies, further inflating their prices. This creates a self-fulfilling prophecy, where index buying pushes prices higher, attracting more buying.
Traditional valuation metrics might seem irrelevant in this scenario. Momentum investing focuses on riding trends irrespective of price-to-earnings ratios or other traditional metrics. The key is identifying stocks with strong upward momentum, regardless of their perceived “fair value.”
Finding the Right Horses : Mi India Top 10 strategy at Weekend Investing exemplifies this approach. By focusing on the top ten performers within Nifty 50, it has significantly outperformed the benchmark this year. This highlights the power of selecting the right “horses” in a momentum race, even if they seem expensive.
Avoiding Losers: A crucial aspect of momentum investing is avoiding stocks losing momentum. The strategy successfully excluded underperformers like HDFC Bank, Hindalco, and Paytm, demonstrating the importance of active stock selection even within a momentum framework.
Bajaj Auto: The Quiet Winner: Bajaj Auto, a stock outside the usual limelight, quietly gained 100% in the past year. This hidden gem emphasizes that momentum can exist outside the usual suspects, and active strategies can uncover such opportunities.
The Takeaway: Don’t be overwhelmed by concerns about overvaluation in crowded trades. Focus on momentum-driven strategies that select the right stocks with strong upward trends, while actively avoiding losers. Remember, sometimes the quiet winners are the ones offering the best rides.
WeekendInvesting Strategy Spotlight !
Rolling CAGR denotes how the CAGR progresses over a period of time. 3 year rolling CAGR denotes the CAGR corresponding to the latest 3 years at any given point in time.
Below is a chart comparing the 3 year rolling CAGR of Mi MT Allcap versus the same on its benchmark, the CNX 500 index. As on 20 Feb 2024, the 3 year CAGR on Mi MT Allcap stands at 42.4% while the same on CNX 500 sums up to 17% (an outstanding beat)
Right since going live back in 2018, Mi MT Allcap’s 3 year CAGR has hovered in the range of 35% to 55% whereas the same on CNX 500 has oscillated between 10% to 30% thus maintaining an extremely healthy lead with solid performance.
If you have any questions, please write to support@weekendinvesting.com
