No. of Recommendations: 9
Another thing always to bear in mind that momentum strategies work extremely well most of the time, and horribly a small fraction of the time. The overall combined result is value added, but one should be aware of the spread of results going in.
So if your momentum strategy breaks once in a while with a horrible whipsaw (spring 2020 anyone?), don't be shocked or depressed. It's all expected as part of the long run averages.
A few tidbits from my quotes file.
"It is universally acknowledged by practitioners and academics alike that the value and momentum factors are the two most persistent and universal methods of capturing excess returns in markets."
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"Prices don’t change when fundamentals change. Prices change when expectations and perceptions change and they could change for various reasons. From a trend follower’s perspective, the main indicator that signals changes in expectations is price. "
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"Leaving aside the potential performance advantages of trend following [i.e., momentum] for a moment, it is just less drama. Case in point, as a trend follower you can avoid getting caught up in the endless debate about whether or not the market is overvalued.
Prices change when expectations for future profits change. Expectations often change before fundamentals change. "
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"Q: why something that is as simple as a price-momentum strategy hasn’t been arbitraged away?
Hancock: I think the main reason for that is it’s just a very painful strategy to run ... when you’re using a price-momentum strategy you’re basically buying stocks that go up, and hoping they go up some more, but if they don’t, they go down, you sell them and buy the other ones that went up instead.
So, the situation in which you lose is you’ve just bought stuff that’s gone up, then it goes down, and then you sell it, and that just makes you look like an idiot, right? It’s a very uncomfortable thing to do.
The arbitrage is less with the strategy than with human nature. Most investors can’t capture the excess returns because they aren’t willing to deal with the difficult inflection points. -- Tom Hancock of GMO."
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" A feature of many winning investment strategies: the arbitrage involved is behavioral, not financial. Good returns derived from uncomfortable strategies do not get arbitraged away, because very few people will actually do it. "
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"the conclusion is that momentum is and always will be a very uncomfortable strategy to run. When it breaks, one is left without special hope of getting additional return, and one is forced to justify a strategy that on the surface of it sounds rather naïve. While the average outperformance is significant, it comes at the cost of occasional large drawdowns.
It is a painful way to lose. And fundamentally, it is the ability to bear that pain for which momentum investors are rewarded.
"A History of Consistent Outperformance, With Occasional Moments of Terror""
