A long term Investing Strategy that beats Nifty returns

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.

source: https://bit.ly/3dosDlD

3 Likes

Seems interesting. Great knowledge

HEy Good work. But when you have to book loss in any year, next year you need extra capital to get an equal return.
The year 2012 has 36% loss, which means next year your return is only the remaining 64% of capital. same is the case with the positive side.