This Rule-Based System BEATS the Market Returns | Ft. Rakesh Pujara | Sanjay Kathuria Podcast EP70

Finance-focused summary (momentum rule-based investing / MILT)

What “momentum” means (as explained)

• Momentum = “chasing what’s already moving.” If a stock’s price is rising, the strategy assumes it will continue moving in the same direction.
• Core premise: keep winners and cut losers—i.e., stop out underperformers rather than “hold and hope.”

Performance / claims and key numbers

• Example NAV growth (CWA MILT 25 smallcase):
  • ₹100 → about ₹211 in ~3 years (spoken as “₹221” and later “₹211”); stated CAGR ~27%.
  • Another benchmark cited in the interview: NSC ₹500 benchmark delivered around ~16% CAGR (index/name not fully clear).
• Benchmark comparison (as stated):
  • Nifty 500 CAGR ~12% over the last 20 years.
  • Nifty 500 Momentum 50 CAGR ~21% over the same period (gap ~9% for 20 years).
• Strategy mechanics timing:
  • Portfolio scan: after Friday close
  • Buy: Monday morning at the open price
  • Re-check cadence: weekly
  • Churn mentioned: ~15% per month, summarized as “churned once or twice in a year”
• Stop/exit parameters:
  • Initial stop loss: 20% (first exit condition).
  • Exit also triggers if:
    • Stock closes below the 23-week moving average (profit protection / trailing mechanism).
    • Volatility-based exit: ATR(14) with threshold 1.8 (if triggered, exit even if other exits aren’t hit)

Biggest mistakes in momentum investing (explicit cautions)

• Biggest mistake: discarding the strategy during short-term underperformance (e.g., panic-selling after a dip).
• Second caution: momentum portfolios may need a systematic “go-to-liquid” / stability mechanism when momentum breaks; otherwise drawdowns can be severe.
  • Suggested diversifiers: gold, and potentially bonds/treasuries rather than remaining fully in equities.

---

Assets / tickers / indices / instruments mentioned

Indices / benchmarks

• Nifty 500
• Nifty 500 Momentum 50
• Mentions of Nifty 50 and Nifty Midcap (in context of churn vs. passive investing)

Universe / holdings concept (not specific tickers listed)

• Universe size: ~750 stocks within a “total market index” structure:
  • ~100 large caps
  • ~150 mid caps
  • ~500 small caps, with additional breakdown noted:
    • 250 small caps
    • 250 micro caps (micro clarification appears slightly inconsistent in the transcript, but “four layers” is clear)

Instruments used for cash/defense (examples, not portfolio tickers)

• Gold (as a “liquid / defensive” alternative)
• Government treasury bills / treasury bills
• Bonds / bond returns (mentioned in inflation-adjusted historical comparison)

Company names referenced (examples)

• Adani group (example of extreme moves in a 2019–18 context)
• Amartech (example of a large rally and potential falling risk)
• TCS and Infosys (example “theme change” story—early certainty vs later environment shift)
• A solar stock and an “inverted circuit” / circuit-down event (company name not clearly captured)
• “sight technology / slight technology” (unclear company name; used to illustrate a rapid double-up)

Smallcase product

• CWA MILT 25 (Compounding Wealth Advisors MILT 25)
• Launch date: 25 March 2023 (on Smallcase)

---

Step-by-step framework (MILТ / CWA MILT 25 “momentum basket”)

Step 0: Define the investable universe

• Start with the total market index universe (~750 stocks).
• Rationale given: since stocks are in the index, the strategy assumes adequate liquidity and that fundamentals “stay within index bounds,” contrasting this with avoiding fundamentals-heavy discretionary selection.

Portfolio size & allocation rules

• Target portfolio: max 25 stocks

• Initial per-stock allocation: 4% (25 stocks → ~100% / 25 = 4%)

• Single-stock weight cap: maximum 10% (risk control against extreme winners / upper circuit events)

Entry filter (primary): Bollinger Band “3.7 standard deviation” trigger

• Uses Bollinger Bands concept (candlesticks + moving average + upper/lower bands).
• Adjusted parameter: 3.7 standard deviations (instead of “2 SD”).
• Rule:
  • If a stock’s weekly closing price is beyond the 3.7 SD condition,
  • then buy on the Monday open price.
• Implementation detail:
  • On Friday close, check the 3.7 SD condition.
  • On Monday morning, execute buys.

“Extra selection” when more than 25 qualify

• First-stage filter can produce >25 candidates (e.g., 40).
• Second filter for ranking (choose strongest):
  • Relative Strength (primary tie-breaker)
  • Optionally ROC and/or “highest growth in last 12 months” (mentioned as optional overlay)
• Filling behavior:
  • Once the portfolio hits 25 stocks, ignore further qualifying signals until an exit creates a slot.
  • In “high momentum” periods, more may qualify—but still cap holdings at 25.

Risk management: three-layer exit system

Any one condition can trigger exit (described as “three conditions” / “layer stop loss”):

1. Initial stop loss (hard stop): -20%
   • Exit if price drops ~20% from entry.
2. Trailing profit protection: close below 23-week moving average
   • Exit if the stock closes below the 23-week MA.
3. Volatility exit: ATR filter
   • ATR(14) with threshold 1.8
   • Exit when ATR criteria indicate excessive volatility / potential giveback.

Rebalancing / churn approach

• Not “rebalance just because weight drifted.”
• If a winner’s weight rises (even to ~15%), do not trim merely because weight increased.
• Strategy emphasis: don’t punish merit; only stop out non-performers.
• Rebalance mainly during extreme disruption scenarios (momentum loss / excessive weight changes mentioned, but not strictly numerically defined beyond examples like 20–30% disruption).

Handling “liquid” / regime shifts

• When momentum breaks, shift toward a defensive sleeve using a rule-based mechanism (example: gold, potentially bonds/treasuries).
• Caution: avoid frequent switching across systems, as it breaks discipline and the systematic edge.

SIP integration idea (practical application)

• If using SIP into the strategy:
  • When units are sold, reinvest SIP proceeds proportionally to that day’s weights.
  • Goal: keep weight-matching, not arbitrary allocation changes.

---

Disclosures / disclaimers

• The guest makes a disclaimer in an example: “there is no recommendation, this is just for the purpose of information.”
• No explicit “not financial advice” wording is captured verbatim, but the “no recommendation / information purpose” disclaimer is present.

---

Presenters / sources mentioned

People

• Sanjay Kathuria — podcast host (referred to as Sanjay Kathuria / Sanjay Kathoria; “Sanjay Kathoria Podcast EP70” as in title)
• Rakesh Pujara — Founder, Compounding Wealth Advisors (CWA)

External authors / research references

• Peter Lynch — quote about: “cut your flowers too early… water your weeds too late”
• Bollinger on Bollinger Bands — referenced for Bollinger Bands framework
• SSRN — referenced for momentum research/backtesting (specific paper not named)
• Nifty / NSE benchmarks — referenced (e.g., Nifty 500, Nifty 500 Momentum 50)