In a wide ranging interview with Tyler Cowen, Cliff Asness discussed momentum and value investing strategies, disagreeing with Eugene Fama, the economics of Ayn Rand, bubble logic etc. The first half of the conversation was mostly about momentum investing and how it works.
Excepts on momentum:
A momentum investing strategy is the rather insane proposition that you can buy a portfolio of what’s been going up for the last 6 to 12 months, sell a portfolio of what’s been going down for the last 6 to 12 months, and you beat the market. Unfortunately for sanity, that seems to be true.
To some, it’s very intuitive. Just buy what’s going up.
It has horrible streaks within that of not working. If your car worked like this, you’d fire your mechanic, if it worked like I use that word. I think it is harder than you might guess, even if something works long term, to have it go away because a lot of investors can’t live through the bad periods. They decide why it’s never going to work again at the wrong time.
Why it works
Underreation: News comes out. Price moves but not all the way. People update their priors but not fully efficiently. Therefore, just observing the price move is not going to move the same amount again but there’s some statistical tendency to continue.
Overreaction: People in fact do chase prices.
How to make it work
If you’re going to be momentum, you’ve got to really do it. You’ve got to be disciplined. You’ve got to come in every day, and you’ve got to count on these under- and overreaction things.
Momentum strategies on StockViz
We have been offering the Momentum Theme for more than two years now. It implements a relative momentum strategy where you compare the strengths of a universe of stocks to each other. 2014 returns were +90% and +36% so far this year (Compare.)
This year, we have introduced Velocity – an absolute momentum strategy – and Acceleration – a strategy that tracks changes in momentum.
If you are interested in momentum investing, please get in touch with us!
It was a good week for the markets over all. Risk was firmly ON and most markets rallied. The market is expecting a US Fed December liftoff. The USD continued to rally against other major currencies, European bonds dipped in negative-yield territory on rumors of more ECB QE and oil dipped bellow $40 a barrel.
Force yourself to relive the anxiety and worry of being down 5% and wondering if 20% is coming next. Remember what it was like to worry that war might break out or disease was spreading or economic collapse was around the corner. Not because this alone is a good practice, but because it is going to happen again, and sooner than you think. It happens every year like clockwork. You can’t pick a time in history that something scary wasn’t around the corner. You need to hold on to those past moment and then recognize that even though it was truly scary life moved on and markets recovered and the world didn’t, in fact, come to an end.
We run our proprietary momentum scoring algorithm on indices just like we do on stocks. You can use the momentum scores of sub-indices to get a sense for which sectors have the wind on their backs and those that are facing headwinds.
Traders can pick their longs in sectors with high short-term momentum and their shorts in sectors with low momentum. Investors can use the longer lookback scores to position themselves using our re-factored index Themes.
You can see how the momentum algorithm has performed on individual stocks here.
Here are the best and the worst sub-indices:
Relative Strength Spread
Refactored Index Performance
50-day performance, from September 04, 2015 through November 20, 2015: