Any Momentum Investors Out There?

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Any Momentum Investors Out There?

Post by gatorman »

Do any of you use momentum as a factor in structuring your portfolio? If so, could you comment about how you go about deciding what securities to include and how long to hold them? Also, do you have an estimate of your average holding time/portfolio turnover? How about your max drawdown? Standard Deviation? Average return? Sharpe ratio? When do you rebalance and what is your rebalancing technique? Do you combine momentum and value in your portfolio? I know that's a lot, but I'd appreciate any information you might care to share.
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Last edited by gatorman on Wed Dec 03, 2014 4:06 am, edited 2 times in total.
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Re: Any Momentum Investors Out There?

Post by NoRoboGuy »

I considered momentum and volatility factors, but decided to limit factor tilts to just size and value. You might want to check out this recent thread if you have not seen it yet:

http://www.bogleheads.org/forum/viewtop ... 0&t=151378
There is no free lunch.
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Re: Any Momentum Investors Out There?

Post by Random Walker »

I invest in momentum via the momentum screens in DFA funds and am considering the AQR style premia fund. Must admit I've turned into an asset class junkie. I strongly recommend Roger Gibson's Asset Allocation. The book will turn anyone into a multi asset class / multi sources of return investor. The goal is to get the annualized return as close as possible to the average annual return by dampening portfolio volatility. So my interests are pointing towards momentum as well. It mixes great with value.
This is a short paper written by Gibson that emphasizes the important points of his book.
http://www.amcham-shanghai.org/amchampo ... esting.pdf

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Re: Any Momentum Investors Out There?

Post by LongerPrimer »

At the beginning of year, target +10% of the investing portfolio. By mid year and onwards, I target at least the sp500, (VTI).
I trade often at +2 or if momentum indicates otherwise using limit sales.
I buy on limit orders, often establishing the low bid.
I should sell at -15% but normally hold too long.
I buy off highs, on a recent low.
I buy disruptive companies. Best in class.
I listen to Jim Cramer interviews.
Trade local utility for its 4% dividends and 6-8%+, total yield.
Currently 90% cash, hold small amount of local gas utility.
I do not day trade. I am active at 3-4 trades/week.
Ytd, +30% and +10% on my two primary trading accts, tax advantaged. Liquidated risk by early Oct. and before mid Oct declines. Probably little to no further trading until 2015. Not sure what I will do in 2015 since I hit our goals.

GL :sharebeer :annoyed
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Re: Any Momentum Investors Out There?

Post by mjb »

A question I always pose, "Is small cap value really all that different than momentum in the long run?"

Look at Vanguard small cap value. A fair number of stocks are no longer small cap value yet are still in the fund due to momentum. Just my 2 cents.
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Re: Any Momentum Investors Out There?

Post by investor »

the Hot Hands fund listed each month by Madsinger is momentum... fund held one year only

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lazyday
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Re: Any Momentum Investors Out There?

Post by lazyday »

I'm interested if anyone has good papers or data on momentum of asset classes. I'm not so interested in momentum of individual securities.

We might find that historically, if an asset class has outperformed for one year, it's likely to continue to outperform. We might also find that if an asset class has outperformed for three years, it's likely to then underperform.

How does this vary for different lookback periods, different historical periods, and different asset classes?

I'd like to use momentum as a minor input for Tactical Asset Allocation.
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Re: Any Momentum Investors Out There?

Post by gatorman »

lazyday wrote:I'm interested if anyone has good papers or data on momentum of asset classes. I'm not so interested in momentum of individual securities.

We might find that historically, if an asset class has outperformed for one year, it's likely to continue to outperform. We might also find that if an asset class has outperformed for three years, it's likely to then underperform.

How does this vary for different lookback periods, different historical periods, and different asset classes?

I'd like to use momentum as a minor input for Tactical Asset Allocation.
I was looking around last night and found this:
http://www.amazon.com/All-About-Momentu ... 0071837485

which hasn't been released yet. I've found the "All About" series books to be quite helpful, Rick Ferri wrote one on asset allocation I thought was really good. So, I preordered it this morning from Amazon even though there aren't any reviews, I can always return it within 30 days if it turns out to be a dud.
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Re: Any Momentum Investors Out There?

Post by nanoanalyzer »

Staying the course requires a lot of momentum, in the physical sense. In that way, yes, I am a momentum investor.
Wikipedia wrote:For example, a heavy truck moving quickly has a large momentum—it takes a large or prolonged force to get the truck up to this speed, and it takes a large or prolonged force to bring it to a stop afterwards.
"If you think stocks are like physics, you believe there must be smart people who can measure exactly where the Dow Jones Industrial Average will be in five months." -Morgan Housel
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Re: Any Momentum Investors Out There?

Post by Sbashore »

I guess I give a nod to momentum in a way. I can only buy and sell a given asset class once in given year, per my IPS. Of course there are other reasons too.
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Re: Any Momentum Investors Out There?

Post by EarlyStart »

nanoanalyzer wrote:Staying the course requires a lot of momentum, in the physical sense. In that way, yes, I am a momentum investor.
Wikipedia wrote:For example, a heavy truck moving quickly has a large momentum—it takes a large or prolonged force to get the truck up to this speed, and it takes a large or prolonged force to bring it to a stop afterwards.

Ditto. I'm happy that my funds allow me not to worry about momentum, which class is best, etc.

I did that on my first run with investing, and it turned out okay. I took some gains, but what a waste of time and energy (for me).
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Re: Any Momentum Investors Out There?

Post by gatorman »

EarlyStart wrote: I did that on my first run with investing, and it turned out okay. I took some gains, but what a waste of time and energy (for me).
So, how did you implement the strategy? Also, what made it difficult to follow?
Thanks for your insights.
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Re: Any Momentum Investors Out There?

Post by gatorman »

investor wrote:the Hot Hands fund listed each month by Madsinger is momentum... fund held one year only

investor
It is interesting that Brad's latest report shows the Hot Hands strategy beating the Sheltered Sam portfolio by over 4% PA since '99. Using Brad's figures, over 15 years $10,000 became ~$55,548 invested in the Hot Hand mutual funds and became ~$30,638 invested in the Sheltered Sam portfolio. The performance difference is quite impressive. That said, raw performance figures don't tell one anything about the maximum drawdown or SD, both important considerations for investors who like to sleep well at night. It does indicate there may be something to the momentum strategy if one could implement it in a way that didn't result in huge SDs or big max drawdowns as compared to more conventional strategies. Hence my post. Anyone out there who has tried it successfully and would care to comment about how best to go about it? How about anyone who has tried it and not been successful? Why did you abandon it?
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Re: Any Momentum Investors Out There?

Post by lazyday »

Found a paper on momentum of asset classes, but don't know how good it is.
our results imply that value and momentum effects are not only present within specific asset classes, but also transcend across entire asset classes
We find statistically and economically significant return premiums between 7-8% for 1-month momentum, 12-1 month momentum and value GTCAA strategies over the 1986-2007 period.
Performance is stable over time, also present for a reduced set of assets over the 1974-1985 period
Interestingly, the 1-month momentum effect is in line with previous findings at the industry level, and contrary to the reversal effects which are reported at the stock level.
Global Tactical Cross-Asset Allocation: Applying Value and Momentum Across Asset Classes
Date posted: August 7, 2008 ; Last revised: June 21, 2013
http://papers.ssrn.com/sol3/papers.cfm? ... id=1079975
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Re: Any Momentum Investors Out There?

Post by gatorman »

lazyday wrote:Found a paper on momentum of asset classes, but don't know how good it is.
our results imply that value and momentum effects are not only present within specific asset classes, but also transcend across entire asset classes
We find statistically and economically significant return premiums between 7-8% for 1-month momentum, 12-1 month momentum and value GTCAA strategies over the 1986-2007 period.
Performance is stable over time, also present for a reduced set of assets over the 1974-1985 period
Interestingly, the 1-month momentum effect is in line with previous findings at the industry level, and contrary to the reversal effects which are reported at the stock level.
Global Tactical Cross-Asset Allocation: Applying Value and Momentum Across Asset Classes
Date posted: August 7, 2008 ; Last revised: June 21, 2013
http://papers.ssrn.com/sol3/papers.cfm? ... id=1079975
Thanks for posting that. The 8% claim is what makes it so interesting. If one could capture a good sized piece of it, it would really ramp up the return on ones' portfolio. The question though is how best to go about doing it, and how to avoid undesirable side effects while doing so.
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Re: Any Momentum Investors Out There?

Post by lazyday »

I'm generally skeptical and cautious about finding practical use of even highly regarded papers.

If I believed in this paper, here's an example of what I might do:

At rebalancing time, I notice that US equity is expensive, with low expected returns. EM has better risk adjusted expected returns. I'm considering slightly reducing my allocation target for US, and increasing EM and Fixed Income.

Looking at 1 month returns, and returns for the first 11 of the last 12 months, I notice that US has outperformed other asset classes, while EM has underperformed. This makes me a little less likely to make the move from US to EM.

Valuation is weighed much more than momentum because even if I strongly believed that asset class momentum is real, I'm more comfortable overweighting something cheap than something with momentum.
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Re: Any Momentum Investors Out There?

Post by gatorman »

lazyday wrote:I'm generally skeptical and cautious about finding practical use of even highly regarded papers.

If I believed in this paper, here's an example of what I might do:

At rebalancing time, I notice that US equity is expensive, with low expected returns. EM has better risk adjusted expected returns. I'm considering slightly reducing my allocation target for US, and increasing EM and Fixed Income.

Looking at 1 month returns, and returns for the first 11 of the last 12 months, I notice that US has outperformed other asset classes, while EM has underperformed. This makes me a little less likely to make the move from US to EM.

Valuation is weighed much more than momentum because even if I strongly believed that asset class momentum is real, I'm more comfortable overweighting something cheap than something with momentum.

I've been doing some reading and that 8% excess return number gets thrown around a lot. Like you, I have my doubts though. 8% excess yield is a huge number and I'm wondering how robust it is? Are there periods where there is no momentum premium, or even a negative momentum premium? If so, how often do they occur and how long do they last? I've got lots of concerns, none of which I've managed to adequately address. Much more study is required.
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Re: Any Momentum Investors Out There?

Post by gatorman »

lazyday wrote:I'm interested if anyone has good papers or data on momentum of asset classes. I'm not so interested in momentum of individual securities.

We might find that historically, if an asset class has outperformed for one year, it's likely to continue to outperform. We might also find that if an asset class has outperformed for three years, it's likely to then underperform.

How does this vary for different lookback periods, different historical periods, and different asset classes?

I'd like to use momentum as a minor input for Tactical Asset Allocation.
Here is a link to a bunch of papers on AQR's website:

https://www.aqr.com/library/search?keywords=momentum

I haven't read them yet, but it appears there will be plenty to discuss as we chew through them (67 papers in total).
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Re: Any Momentum Investors Out There?

Post by gatorman »

This slide presentation:

http://74.115.228.67/wp-content/uploads ... slides.pdf

seems to show that momentum strategies work very well during "normal" market conditions, but severely underperform after a crash.
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Re: Any Momentum Investors Out There?

Post by ot1138 »

Momentum and value strategies are pretty much the bedrock of retail trading. They've stood the test of time (my father used to trade using both of these techniques in the 70s). Most strategies are simply variants of these.

Ironically, I was a floor trader and that experience gave me a healthy fear of market timing. However, I have done my own modeling and in some markets, momentum strategies appear to be successful at reducing volatility while maintaining (or even slightly enhancing) average returns. Based on this research, I have dipped my toes in the water this year. My system generates very few trades... typically just a handful every year based on historical data.

Anecdotally, I have been successful with four out of four trades since I've started and I'm up about 11% YTD (as of a couple of weeks ago).

1) Went into VNQ in Jan 2014
2) Got out of emerging markets and Euro equities a few months ago
3) Increased my holdings in US equities at the end of September

(Note that #3 is typically not found in most momentum strategies... my system is a bit atypical in that regard.)

Good luck!
OT1138
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Re: Any Momentum Investors Out There?

Post by Runalong »

I reluctantly use Momentum. It would be dumb not to, but I'm otherwise more comfortable with a Value approach. So yes, I combine them. I have some momentum stocks that are clearly not value-priced and I have some value stocks that show no momentum but mostly I'm looking for equities that combine elements of both. I look at all the relevant measures of valuation but usually emphasize EV/EBITDA.

Momentum over the most recent 12 month period is more predictive than shorter-term momentum. I believe that momentum can reflect greedy investors jumping into the latest hottest fad, or it can represent an underlying positive change in management or business strategy. When a company begins to turnaround due to such changes, investors are initially skeptical but as earnings and profits continue to grow more and more investors become believers. Eventually the momentum (which can easily become a self-fulfilling prophecy once investors jump in simply because it has now become a Momentum stock) outruns reasonable valuations and the stock can fall rapidly at the first sign of stumble in execution by the management. If the management and strategy are truly strong, growth will continue for quite awhile and I think this is where most momentum-based winners come from.

As long as a momentum stock is outperforming and it's valuations are not becoming extreme, I will hold onto it. If it doubles I sell half (recapture my original investment) and hold onto the remainder "semi-forever". My other sale rule is that if I buy a stock and it underperforms it's relevant index by 25% I sell it but I very rarely hold under-performers that long.

My current holdings include: HA & HSKA, up 16 & 11% respectively since I bought them on 11/5; SHPG +24% (10/16); ACT +15% (10/13); SKX, AMOT & EW, -5%, +48%, +30% respectively (all 9/16); PPC +49% (5/14); OVTI +37% (5/6); NXPI =32% (3/26). I've also been doing well with non-mo stocks such as INTC, HPQ, AAPL & BRK.B. I also have stocks that are more or less tracking VTI. My three biggest losers this year each lost about 20%, there have been many others that I have sold somewhere in the +10% to -10% range. I generally sell and buy 2 stocks per week so one needs to invest enough in each one to minimize trading costs.

I do tend to slightly underperform the market as a whole on down days so as I get older I very gradually find myself shifting ever more toward a preference for value over momentum. But not too much, I'm not THAT old.
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Re: Any Momentum Investors Out There?

Post by gatorman »

ot1138 wrote:Momentum and value strategies are pretty much the bedrock of retail trading. They've stood the test of time (my father used to trade using both of these techniques in the 70s). Most strategies are simply variants of these.

Ironically, I was a floor trader and that experience gave me a healthy fear of market timing. However, I have done my own modeling and in some markets, momentum strategies appear to be successful at reducing volatility while maintaining (or even slightly enhancing) average returns. Based on this research, I have dipped my toes in the water this year. My system generates very few trades... typically just a handful every year based on historical data.

Anecdotally, I have been successful with four out of four trades since I've started and I'm up about 11% YTD (as of a couple of weeks ago).

1) Went into VNQ in Jan 2014
2) Got out of emerging markets and Euro equities a few months ago
3) Increased my holdings in US equities at the end of September

(Note that #3 is typically not found in most momentum strategies... my system is a bit atypical in that regard.)

Good luck!
OT1138
Thanks for your input. For the past several nights, I've been working on a spreadsheet to look at momentum. Based on what I'm seeing, your trades make perfect sense from a momentum standpoint. VNQ has been doing quite well. Europe and EM have been doing quite poorly and US large and mid cap growth stocks have been strong, although US small caps, and US value stocks in general, have not done as well. Based on momentum, I ranked the top 5 (of the 34 etfs I'm following) as follows, QQQ,VGT,VOT,VUG and EDV (that was a surprise!). VNQ was sixth on my list. VWO (EM) was ranked 23rd and VGK (Europe) was ranked 26th.
Just a quick warning, no one should trade based on anything I say because I'll be the first to admit, as the old trader said, when it comes to the stock market, "Nobody (me included) knows nuthin'." I'm here to learn, not to teach, or for that matter, to give investment advice. I don't currently own any of the securities I mentioned, and don't have any plans to buy them, because I'm still quite undecided as to whether adding momentum to my portfolio is really something I should be doing.
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Re: Any Momentum Investors Out There?

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lazyday wrote:I'm interested if anyone has good papers or data on momentum of asset classes. I'm not so interested in momentum of individual securities.

We might find that historically, if an asset class has outperformed for one year, it's likely to continue to outperform. We might also find that if an asset class has outperformed for three years, it's likely to then underperform.

How does this vary for different lookback periods, different historical periods, and different asset classes?

I'd like to use momentum as a minor input for Tactical Asset Allocation.
I found another book on momentum strategies with the somewhat provocative title of Asset Rotation: The Demise of Modern Portfolio Theory and the Birth of an Investment Renaissance and purchased a copy. I'll let you know if it is any good. More details here:

http://www.amazon.com/gp/product/111877 ... UTF8&psc=1


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Re: Any Momentum Investors Out There?

Post by lazyday »

I'd feel better about books or papers that have been vetted by reputable academics or people whose opinion I trust, or ones written by academics or practitioners with a reputation for strong work.

Are you interested mostly in momentum of asset classes, like I am? If you're also interested in momentum of individual securities, or indexes of them built to capture the momentum factor, then it might be easy to find good papers.
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Re: Any Momentum Investors Out There?

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lazyday wrote:I'd feel better about books or papers that have been vetted by reputable academics or people whose opinion I trust, or ones written by academics or practitioners with a reputation for strong work.

Are you interested mostly in momentum of asset classes, like I am? If you're also interested in momentum of individual securities, or indexes of them built to capture the momentum factor, then it might be easy to find good papers.
I think I'm most interested in momentum investing as applied to index and sector ETFs, although I also intend to add ETFs for individual countries, for currencies, for commodities and for inverse etfs, just to see how they fit into the overall puzzle. I think individual stocks are too risky as they are subject to risks which one can not diversify away except by holding a large number of them, something I'm unprepared to do except in the context of an etf.

The last title I posted has recommendations from a lot of folks I respect, the first one, not so, as it is apparently not even available to review. The source for the 67 papers, AQR (Cliff Asness' company), is one with more than a little cred. So I'm with you on that. I like to see a name I recognize and respect. That doesn't mean I won't look at other resources, just that I'll look at them a little closer.
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Re: Any Momentum Investors Out There?

Post by vencat »

Really surprised that no one has mentioned Robert T's multiple discussions regarding momentum (with specific ETF recommendations). One such thread http://www.bogleheads.org/forum/viewtop ... 0&t=145847.
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Re: Any Momentum Investors Out There?

Post by gatorman »

vencat wrote:Really surprised that no one has mentioned Robert T's multiple discussions regarding momentum (with specific ETF recommendations). One such thread http://www.bogleheads.org/forum/viewtop ... 0&t=145847.
I appreciate your posting the link. I missed that thread when I did a keyword search on momentum before starting this thread.
Thanks!

I think Robert T. has a different emphasis than mine. I believe he is talking about buying a momentum etf or fund as part of one's overall allocation (i.e., devoting x% of one's portfolio to momentum etfs/funds). What I'm trying to do is to identify etfs which are exhibiting momentum, whether or not they designate themselves as momentum funds or etfs.
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Re: Any Momentum Investors Out There?

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Runalong wrote:I reluctantly use Momentum. It would be dumb not to, but I'm otherwise more comfortable with a Value approach. So yes, I combine them. I have some momentum stocks that are clearly not value-priced and I have some value stocks that show no momentum but mostly I'm looking for equities that combine elements of both. I look at all the relevant measures of valuation but usually emphasize EV/EBITDA.

Momentum over the most recent 12 month period is more predictive than shorter-term momentum. I believe that momentum can reflect greedy investors jumping into the latest hottest fad, or it can represent an underlying positive change in management or business strategy. When a company begins to turnaround due to such changes, investors are initially skeptical but as earnings and profits continue to grow more and more investors become believers. Eventually the momentum (which can easily become a self-fulfilling prophecy once investors jump in simply because it has now become a Momentum stock) outruns reasonable valuations and the stock can fall rapidly at the first sign of stumble in execution by the management. If the management and strategy are truly strong, growth will continue for quite awhile and I think this is where most momentum-based winners come from.

As long as a momentum stock is outperforming and it's valuations are not becoming extreme, I will hold onto it. If it doubles I sell half (recapture my original investment) and hold onto the remainder "semi-forever". My other sale rule is that if I buy a stock and it underperforms it's relevant index by 25% I sell it but I very rarely hold under-performers that long.

My current holdings include: HA & HSKA, up 16 & 11% respectively since I bought them on 11/5; SHPG +24% (10/16); ACT +15% (10/13); SKX, AMOT & EW, -5%, +48%, +30% respectively (all 9/16); PPC +49% (5/14); OVTI +37% (5/6); NXPI =32% (3/26). I've also been doing well with non-mo stocks such as INTC, HPQ, AAPL & BRK.B. I also have stocks that are more or less tracking VTI. My three biggest losers this year each lost about 20%, there have been many others that I have sold somewhere in the +10% to -10% range. I generally sell and buy 2 stocks per week so one needs to invest enough in each one to minimize trading costs.

I do tend to slightly underperform the market as a whole on down days so as I get older I very gradually find myself shifting ever more toward a preference for value over momentum. But not too much, I'm not THAT old.
So, how do you measure momentum? Reading between the lines would you look for outperformance versus a peer group? Or, do you look for outperformance versus an index? Do you use screeners to identify stocks? If so, what are your screening parameters and what screener works best to screen for momentum?
Thanks,
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Re: Any Momentum Investors Out There?

Post by gatorman »

I've been doing a lot of reading and I've found that when people talk about momentum, they may be addressing two different concepts using the same term. First, there is "cross-sectional momentum" which is the price change of a security as compared to its peers. In the literature that is probably the most discussed type of momentum. The second type is "time series momentum" which measures the performance of a security in reference to its own past performance. I'm most interested, and I think most investors on this forum would be most interested, in time series momentum. Time series momentum is discussed in detail in this paper by Moskowitz, et al:

https://www.aqr.com/library/data-sets/t ... rs-monthly

which discusses time series momentum in the context of futures contracts for commodities, currencies, stock equity indexes and bonds. Quite interestingly the authors find diversified portfolios of the securities they studied had Sharpe ratios in excess of 1. I'll leave you with that tidbit and hopefully some of you will read the paper and provide a critique.
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Re: Any Momentum Investors Out There?

Post by daffyd »

If you'd like more sources of information, Alpha Architect have reviewed a bunch of "risk management" strategies that include time series momentum:
http://www.alphaarchitect.com/blog/2014 ... IIvodWUe74

They find most aren't "robust" and suggest only the simplest rules are:
1. Time Series Momentum Rule (MOM): If Excess return >0, go long risky assets
2. Simple Moving Average Rule (MA): If Current Price – Moving Average (N) > 0, go long risky assets

They highlight the importance of implementation, particularly keeping costs low (including transaction and tax costs). I don't think these approaches are worthwhile in my situation but depending on your degree of conviction and your tax situation YMMV.
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Re: Any Momentum Investors Out There?

Post by gatorman »

daffyd wrote:If you'd like more sources of information, Alpha Architect have reviewed a bunch of "risk management" strategies that include time series momentum:
http://www.alphaarchitect.com/blog/2014 ... IIvodWUe74

They find most aren't "robust" and suggest only the simplest rules are:
1. Time Series Momentum Rule (MOM): If Excess return >0, go long risky assets
2. Simple Moving Average Rule (MA): If Current Price – Moving Average (N) > 0, go long risky assets

They highlight the importance of implementation, particularly keeping costs low (including transaction and tax costs). I don't think these approaches are worthwhile in my situation but depending on your degree of conviction and your tax situation YMMV.
Interesting article. Thanks for posting it.
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Re: Any Momentum Investors Out There?

Post by gatorman »

Mebane Faber published a paper illustrating the construction and returns of various momentum portfolios. He claims a 3-6% addition to returns over those of a 10 sector equally weighted portfolio. Here is a link:

http://papers.ssrn.com/sol3/papers.cfm? ... id=1585517

His paper is also valuable because he references in one spot many of the original papers which documented the momentum premium.
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Erwin
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Re: Any Momentum Investors Out There?

Post by Erwin »

Check this out. A detailed methodology for investing using momentum+value:
The Case for Value and Momentum at the Asset Class Level
http://www.elmfunds.com/uploads/1/2/0/2 ... .03.13.pdf
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Re: Any Momentum Investors Out There?

Post by Bfwolf »

I do not use momentum because I can find no rational argument for why it should persist.

With small and value, at least there's the argument that those asset classes are riskier to explain why higher expected returns should persist.
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Re: Any Momentum Investors Out There?

Post by gatorman »

mpt follower wrote:Check this out. A detailed methodology for investing using momentum+value:
The Case for Value and Momentum at the Asset Class Level
http://www.elmfunds.com/uploads/1/2/0/2 ... .03.13.pdf
Thanks for the link. The authors report an excess return of 1.8% for momentum even though their approach allows negative momentum funds into the portfolio (albeit at a reduced level). They also report a 1% excess return for value. So their total claimed excess return is 2.8%, which is not bad. More importantly, by combining momentum and value, they claim to be able to eliminate portfolio drawdowns during market declines. If that turned out to be true, it would be a huge improvement for any investor willing to adopt their approach. Thanks again for posting the link, an interesting paper.
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Re: Any Momentum Investors Out There?

Post by gatorman »

Bfwolf wrote:I do not use momentum because I can find no rational argument for why it should persist.

With small and value, at least there's the argument that those asset classes are riskier to explain why higher expected returns should persist.
I'm not suggesting you should use momentum, but this might answer some of your questions:

https://www.man.com/US/EN/page?pageID=1396

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Re: Any Momentum Investors Out There?

Post by gatorman »

Here is a link to a paper by Asness et al, which examines portfolios constructed with momentum and value components. The authors found evidence of cross-sectional momentum as they put it, "everywhere" and were able to develop portfolios having very high Sharpe ratios using value and cross-sectional momentum components. Here is the link:

http://papers.ssrn.com/sol3/papers.cfm? ... id=2174501
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Re: Any Momentum Investors Out There?

Post by gatorman »

Yet another paper, this one by Moskowitz et al which discusses after tax returns of various strategies. They find momentum to have the highest after tax returns followed by value, market and growth strategies. I would have thought value would have been the most tax-efficient, but the ability to make use of short term losses generated by the momentum strategy coupled with most of the returns in the value strategy resulting from dividends caused momentum to come in first despite much higher portfolio turnover. Here is a link:

http://papers.ssrn.com/sol3/papers.cfm? ... id=2089459

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Re: Any Momentum Investors Out There?

Post by gatorman »

GMO wrote a paper on momentum investing, concluded it should not be a major portion of one's portfolio, but could be useful in conjunction with other strategies. Link here: http://dorseywrightmm.com/downloads/hrs ... mentum.pdf
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Re: Any Momentum Investors Out There?

Post by ot1138 »

lazyday wrote:I'd feel better about books or papers that have been vetted by reputable academics or people whose opinion I trust, or ones written by academics or practitioners with a reputation for strong work.

Are you interested mostly in momentum of asset classes, like I am? If you're also interested in momentum of individual securities, or indexes of them built to capture the momentum factor, then it might be easy to find good papers.
You won't have to look too hard. There are many papers on this subject.
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Re: Any Momentum Investors Out There?

Post by lazyday »

Most papers are on momentum of individual securities, or cross sectional momentum. Also I don't know how to select the good papers from the marginal.
mpt follower wrote:The Case for Value and Momentum at the Asset Class Level
http://www.elmfunds.com/uploads/1/2/0/2 ... .03.13.pdf
Reading this one and like how easy it is to understand without an economics degree.
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Re: Any Momentum Investors Out There?

Post by gatorman »

lazyday wrote:Most papers are on momentum of individual securities, or cross sectional momentum. Also I don't know how to select the good papers from the marginal.
mpt follower wrote:The Case for Value and Momentum at the Asset Class Level
http://www.elmfunds.com/uploads/1/2/0/2 ... .03.13.pdf
Reading this one and like how easy it is to understand without an economics degree.
I think the papers posted by Asness's company are reliable and I'd trust anything from GMO. I think Faber writes some good stuff as well, and his is more readable than most, as he isn't a pure academic. Asness has a Ph.D. from Chicago, Moskowitz is a professor at Chicago. Faber has a degree in engineering science, which, as an engineer, I can tell you means he is probably pretty good at math. Tom Hancock who wrote the GMO paper has a doctorate in computer science. I'm not sure about the academic credentials of the authors of the other sources I and others have posted.
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Re: Any Momentum Investors Out There?

Post by gatorman »

If you are interested in doing further reading, here is a link to a good bibliography courtesy of AQR:

https://www.aqr.com/library/bibliograph ... strategies

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Re: Any Momentum Investors Out There?

Post by gatorman »

A few things I've picked up in my reading:

1. Excess Returns for Momentum: You'll see the number 8% thrown out in a number of places. That is the historical number for long-short portfolios. A long only investor (most of us) should not expect to get that kind of excess return. Larry Swedroe stated 52% of the excess return comes from the long side, so if one was able to execute the strategy perfectly, one might expect to see an excess return of 4% plus a little. That won't happen though, no one will execute the strategy perfectly and there are costs associated with employing the strategy buy and hold investors don't encounter, so 4% is really the very outer limit of what a long only investor might see. Recently, the excess return for long short momentum portfolios has been more like 6%, so that cuts another percent off the return of a long only investor. So, if you saw 3% excess return, you'd be doing great. Realistically speaking, the attainable excess return is probably less. That said, the momentum premium is still larger than the HmL or SmB premiums.

2. Value and Momentum. Good news! They appear to be negatively correlated. That means a combined value-momentum portfolio might work pretty well. If I decide to use momentum, I think that's the direction I'm headed.

3. Momentum After a Major Sell-off. Bad news! Momentum strategies are basically trend following techniques, so when the trend suddenly changes, watch out below. If one adopts the strategy, he or she must be willing to accept that it will perform poorly after a market crash. Personally, I would be quite uncomfortable using it unless I had some kind of a non-Bogleheadish stop loss in place.

4. Momentum Droughts. There have been long periods (10 years +) when momentum disappeared. But that applies to all the anomalies, so if one is going to be, for example, a value investor, or a small company investor, the same kinds of droughts can be expected. One just hopes they don't show up simultaneously.

5. Use in Taxable Portfolios. I've seen statements in the popular financial press that momentum should only be used in tax deferred accounts. But the Moskowitz paper I cited in an earlier post says momentum portfolios are the most tax efficient of any of the portfolios attempting to exploit the four anomalies (momentum, size, value and equity premium). I don't intend to use it with my non-deferred accounts, but if you do, you should look carefully at the Moskowitz paper to see if you agree. Getting the tax aspect wrong can be a real killer.

That's all I've got for the moment, but as I get a better understanding of momentum investing, I'll post more. I've got books on the way.
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Re: Any Momentum Investors Out There?

Post by gatorman »

Interesting presentation from Meb Faber discussing enhancements to Cambria's momentum trading system:

http://mebfaber.com/2012/03/05/how-to-g ... s-to-qtaa/

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Re: Any Momentum Investors Out There?

Post by gatorman »

One question I have is in regard to the optimum lookback period for determining momentum- what is it? the answer is, as far as I can tell thus far, "it depends," as more thoroughly explained in this article:

http://seekingalpha.com/article/2115393 ... ck-horizon

I'm actively looking for more information on optimal lookback periods, so if you have a reference, please feel free to post it.

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Re: Any Momentum Investors Out There?

Post by gatorman »

Very interesting presentation on momentum from Kent Daniel of Columbia:

https://www.youtube.com/watch?v=2w1OYDeTfsk

He points out how poorly momentum works after major bottoms and suggests a strategy to overcome the poor performance. This is worth watching.

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Re: Any Momentum Investors Out There?

Post by gatorman »

Steve Forbes interviews Cliff Asness of AQR. Asness talks about the benefits of the combination of value and momentum in one's portfolio. Also discusses the carry trade and low beta strategies.

https://www.youtube.com/watch?v=2w1OYDeTfsk

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Re: Any Momentum Investors Out There?

Post by garlandwhizzer »

Thanks, gatortman, for these informative posts.

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