Momentum Investing Works Until it Doesn’t

A recent article in InvestmentNews highlights how momentum investing—buying shares of whatever is rising the fastest and selling when these stocks “lose steam”–has been performing well of late. However, the article warns, that unless investors “have a long holding period and an appetite for risk, it might be better to wait until momentum cycles in and out of style once again.” A type of growth investing, a momentum approach is not “inherently wrong,” the article says, adding that any index using market cap weighting falls under this category. However, it also argues that, like “the Great Circle of Life, everything […]

Hulbert Says Momentum Investing Lives

There are still good reasons for investors to pursue a momentum strategy, writes Mark Hulbert in a recent Wall Street Journal article. He offers data collected by Eugene Fama (University of Chicago) and Kenneth French (Dartmouth College) showing that over the past ten years the stocks in the top decile vis a vis performance outperformed the S&P 500 by just 1.3 percentage points. “That is less than one-fifth as much as the strategy’s average annual advantage over the past 90 years, and certainly not enough to pay the considerable expenses…involved in the high turnover of a momentum portfolio.” But Hulbert […]

Morningstar Compares Research Data to Real-World Investing

There is an abundance of research data regarding how investors can maximize returns, but it doesn’t necessarily translate into real-world results, according to a recent Morningstar article. Alex Bryan, Morningstar’s director of passive research in North America, shared his insights on some discrepancies between the two: Fama-French Value Factor: In 1992, these economists found that stocks trading at low valuations, specifically low price-book ratios, have tended to provide higher returns than those trading at higher multiples.  However, their research targeted a particular number of stocks traded (30%) which is quite different than how most funds are constructed (by market capitalization).  […]

Adding Momentum to Your Portfolio

The tendency of recent market performance to persist, an effect known as momentum, has been pervasive even though it is a “blatant violation” of what you would expect in an efficient market. This according to Alex Bryan, director of passive strategies research for Morningstar, in a recent interview. Bryan explains that extensive research has uncovered three theories behind this: Behavioral biases. Investors may underreact to new information because they “anchor” their investment strategies to old information. This can cause market prices to react more slowly than they should. Investors are reluctant to sell stocks that have decreased in value. Instead, […]

Momentum Investing is Back, At Least for Now

The strategy of buying whatever sector has had the greatest price or earnings gains in the past twelve months seems to have come back in fashion, according to a recent article in Investment News. The article cites a recent white paper by AQR that addressed momentum investment results and reported that “trend-following has delivered strong positive returns and realized a low correlation to traditional assets classes for more than a century.” At the Morningstar ETF conference early in September, AQR principal Ronen Israel said that academic studies assume over-inflated trading costs associated with momentum investing (typically considered a disadvantage) and, […]