A long term Investing Strategy that beats Nifty returns

  • Oct-12-2020

How about an investing rule that makes you place just one trade a year, with just one stock but still beats the Index returns. I tested this simple momentum logic with last 12 years of historical data on Nifty 50 stocks.

In order to avoid the hindsight bias, instead of testing with current Nifty 50 stocks, I have considered list of stocks that are part of Nifty 50 at the time of each of these 12 years. If I test with year 2008, then I test with list of stocks that are part of Nifty 50 during that time, stocks like RCOM, UNITECH, SUZLON were part of Nifty 50 during those years. By following this approach we get realistic results.

Here’s the rules.

  1. By end of December each year, find the worst performing stock, buy that stock and hold it for one year, sell it next year December
  2. By end of December each year, find the best performing stock, buy that stock and hold it for one year, sell it next year December

We shall test both approach so that we will know which one makes more returns, buying the worst performer or best performer.

Buying the worst performer:

As per the first rule, we checked which stock performed worst by Dec each year, in below example, Unitech was the worst performer in the year 2008, going down -91%. Its price was 32.5 Rs. , we invest in this stock, hold it for 365 days, sell it by next year Dec. By 2009 Dec, Unitech stock price was 65.8, its 102% gain. So we sell that stock and check which was the worst performer for year 2009 and invest in that, it was Rcom in 2009, so we buy that. Repeat this year after year.

This is how over all returns looks like for last 12 years from 2008 to 2020, over all it made only 8% returns, where as Nifty has made 171% returns, with average yearly returns of 14%

So it is clearly evident that buying the worst performer has lead to poor returns.

Buying the Best performer:

As per the second rule, we checked which stock performed best by Dec each year, in below example, HINDUNILVR was the best performer in the year 2008, moved up 17%. Its price was 250 Rs. , we invest in this stock, hold it for 365 days, sell it by next year Dec. By 2009 Dec, HINDUNILVR stock price was 264.8, its 5.7% gain. So we sell that stock and check which was the best performer for year 2009 and invest in that, it was TATA MOTORS in 2009, so we buy that. Repeat this year after year.

This is how over all returns looks like for last 12 years from 2008 to 2020, over all it made only 266.5 % returns with average returns of 22.2%, where as Nifty has made 171% returns, with average yearly returns of only 14%

Conclusion:

Based on the above analysis, we can conclude that just buying the best performing Nifty 50 stock with one year holding period has out performed the benchmark returns consistently. We really don’t need complex rules to make good returns, such simple rules do work well. If you liked this article, please do share share it (WhatsappTwitter) with other Traders/Investors. 


  • profile
    everything here
      1 month ago

    kindly backtest top 10 stocks on the basis of monthly rebalancing.. 365 days gainers

    Reply 1 comments
    • profile
      Square Off
        1 month ago

      Sure, will do and update later

  • profile
    everything here
      1 month ago

    where can i get historical 365 days gainer data

    Reply 1 comments
    • profile
      Square Off
        1 month ago

      Its not available anywhere, you need to download historical data and do you own analysis to find the info

  • profile
    Srinivasan Gopal
      1 month ago

    Interesting analogy and simple

    Reply 1 comments
    • profile
      Square Off
        1 month ago

      Thanks, glad you liked it

  • profile
    Ramesh Babu
      1 month ago

    Sir if I invest in top 10 stocks every year end what will be the results

    Reply 1 comments
    • profile
      Square Off
        1 month ago

      Returns would get reduced, as too much of diversification would reduce the returns and risk

  • profile
    Vishnu Makam
      1 month ago

    Apart from December being the last month of the year is there any other reason for selecting December particularly ? What if we tried the same thing with last month of the financial year Would it work better ?

    Reply 1 comments
    • profile
      Square Off
        1 month ago

      I guess, applying the logic on financial year should also provide similar returns, the here is longer holding period.

  • profile
    Rishit Kumbhani
      1 month ago

    Kiru Superb Insights on this one. Really appreciate the time and logic you have made which will help investors like us. Keep it up !

    Reply 1 comments
    • profile
      Square Off
        1 month ago

      Thanks, am glad you liked it.


  • Tags | LONG TERM INVESTMENT,dual momentum investing,quantitative investment,A long term Investing Strategy,Investing Strategy,momentum trading,nifty investment strategy,nifty 50 investment strategy