At Marathon Trends, our investment process is an actively managed framework that allows us to quantify fundamental factors along with price and volume behaviour, then use our systemized approach for stock selection and portfolio construction.
We have a four-step process:
In India, we have over 5000 listed stocks. However good volumes are limited to few hundred. As an institutional investor, it is imperative for us to participate in the liquid space of the market to facilitate entry and exit efficiently. It has been our observation that the biggest losses in investor portfolios happen when they are trapped in stocks they want to exit, but the market does not give them an exit, due to low liquidity or very high impact cost.
To overcome this, our first filter is to eliminate stocks from our investment universe which are exit traps. The model changes our investment universe up and down based on:
The aim is to always invest in stocks that have adequate volume to allow the fund to enter and exit efficiently. Depending on the allocation of the fund for that specific stock, this is variable and fluid, it scales up and down based on the size of funds AUM.
To participate in the journey of long-term compounding, it is important to be in secular growth stocks. In India, we have observed big wealth has been created in secular growth stocks and going ahead, the market will continue to offer many more such wealth creating opportunities. Our Fundamental CHECKLIST involves:
The aim is to invest in fundamentally good stocks that have consistent and strong trending earnings.
Our Quantitative research uses two of the most reliable and unchangeable data points in our markets - price and volume. Large amounts of data points are crunched and analysed by us, to help us overlay on our fundamental stock selection, a ranking process based on trending prices. Having fundamentally good stocks which do not have trending prices are of no use to our investors, they do not help us generate returns for investors, which is the end goal of the investment process.
We have observed over many cycles that “stocks that fall less in falling markets, are leaders of the next bull market”. We quantify this thought process through our model, which helps us identify the stocks we want to invest in. Our model apart from price momentum also measures price volatility and volumes. This model specializes in finding stocks that fall less in falling markets (control risk) and are the first to move up when the market recovers (returns).
Ultimately, we want to be in stocks which have trending earnings and trend prices. We feel this process helps us build a portfolio of stocks that deliver superior risk adjusted returns to our investors.
Risk: Returns by itself have no meaning unless it is looked at through the prism of risk. We give our investors superior returns with a low drawdown. Apart from portfolio diversification and other risk control techniques, we feel the most important weapon in the armoury of risk control is “the exit” process and the discipline to execute the sell decision. A very good exit process is integral to risk management.
Exit: Our research team constantly monitors our investments to look for change in trend in earnings and prices of our invested stocks. The secret sauce of our model is that we have built parameters that overlap in both the areas (fundamentals and quantitative) almost simultaneously. The challenge of a Quantamental model is to combine the fundamental and quantitative models in such a way that the outputs overlap and are in very good synchronicity. What we look for in the sell decision is- rate of change (deceleration), in earnings and prices. We have observed that the markets reward and punish stocks based on their rate of change in earnings rather than an absolute number.
Our model captures this change in the rate of earnings quantitatively. This gives us a warning in the change in trend. This generally also finds expression in rate of change in stock price. The clarity we get in this sell decision making process, is thanks to a well-defined model.
Clarity in the sell decision is what gives us discipline in the exit process. The most difficult part in the investment game is the sell decision. Very often, investors fall in love with their profitable investments and this becomes a major barrier to profit taking. Booking a loss is even more difficult because it is a hit to the ego (it is accepting we are wrong). However, we cannot but totally agree with the title of a famous book on investments by D.L Cassidy “it’s when you sell, that counts”.
Having had an opportunity to work and interact with some of the most successful investors in India, one trait that runs through all of them is they “cut their losses”. This principal is so linked to the power of compounding. The biggest Waterloo of novice or unsuccessful professional investors is “cutting their profits early and riding their losses”. In fact, if we are asked to summarize our investing process in one line it is “cut your losses early and let your profits run for long”.