I will try to think aloud here about this strategy.
At Valuepickr, where majority members are doing business analysis, trying to find valuable companies , understandig balance sheets, and annual reports, concalls, line by line, this quantitative momentum seems very alien. But lets give some thought to it, what exactly its trying to achieve.
But before that, we will see how our index , or for that matter any major index of any country, how its constituted and how its changed over time. Do you think, Sensex or Nifty or S&P 500 are formed by their committee by doing business analysis, their valuation? Do you think they see PE ratio, PB ratio, quality of promoters, business moats and then enter the stcoks in Index. And remeber these Indexes are followed all over the world and its an indicator of overall equity market of that country and most institutional investment happens in these Indices.
The basic structure of Index is, they are market capitalization weighted and selected in Index on the basis of their size and liquidity of trading. Any stock which gets place in Index, has a history of strong performance behind it and it becomes big and eligible to enter into Index. Like recently Trent is entering into Nifty 50 Index. Have theyr considered its PE of 200 before making it part of Index. Similarly LTI MINDtree and DIVIS labs are gpoing out of Nifty 50…Is it because they have lost their moats?
a Big No. All Indices, inluding Nifty are based on quantitative momentum but with a large view. They are also rebalanced every six months and most performing ( price wise) and most liquid are taken inside. And less liquid and non performing are thrown out.
So even if we feel and think , this strategy is alien, actually its practised everywhere and from long long time in one form or the other, with difference of screening criteria.
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