Momentum investing

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Park
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Momentum investing

Post by Park » 29 Oct 2017 13:11

Link to an article by Robert Arnott et al (Research Affiliates) on momentum.

http://www.etf.com/sections/features-an ... nopaging=1

Points out that although momentum on paper has done very well, but in practice, less so.

They then discuss what can be done about this.

"from 1928 to 2016. Suppose we buy a cap-weighted portfolio of the 20% of stocks that performed best in the last 12 months—excluding the latest month—and sell short a cap-weighted portfolio of the 20% of stocks that performed worst over the same period—again excluding the latest month—and then hold that long–short portfolio unchanged for the next 36 months...In the first month, our long portfolio beats our short portfolio by an average of 90 bps...the strategy earns an additional 77 bps in the second month, then 57 bps in the third month, and so forth. After eight months, the momentum portfolio starts to lose money. After less than two years (24 months), the portfolio has lost all of its gains and is underwater."

The vast majority of the return is by the 6th month. You've peaked by the 8th month. By the 10th month, the slope of the curve is becoming noticeably negative. By the 12 month, you're a little lower than you were at the 6th month.

"consider using momentum to block trades initiated by other strategies. Suppose, for example, a value strategy tells us to sell a hot stock that’s on a tear. Suppose, at the same time, our value strategy tells us to buy a lousy company that is in freefall. If momentum is used to defer both of these trades until the momentum (strong for the former, weak for the latter) dissipates, then we are able to catch the early performance illustrated in Figure 3, without suffering from the later performance dissipation..

On average, a stock in the momentum long–short portfolios (20% long and 20% short), drops out after about five months. Individual examples will be all over the lot, of course, ranging from far shorter to far longer. In our average experience, however, Figure 3 shows that we would have earned a 3.33% benefit on this pair of deferred trades in that first five months (or 8.0% a year)...

consider a value strategy with 50% annual turnover. Suppose that at least 20% of this turnover will be blocked. The actual amount is probably much higher because buys are more likely to have weak momentum than strong, and hence to be blocked, and sells are more likely to have strong momentum than weak, and hence to be blocked. Note that the blocking will not cut turnover, just delay the trades. If our strategy has 50% turnover, if 20% of the trades are deferred, and if trade blocking delivers 8.00% a year on each pair of blocked trades, we’ve just boosted the performance of our value strategy by 120 bps a year...The trading costs are free, because we’re not doing any trading we weren’t going to do anyway...

One weakness of standard momentum strategies is that they do not distinguish between stocks as to whether they are early or late in their momentum cycles. We call the first group fresh momentum and the latter stale momentum. Stale momentum stocks are typically very expensive on the long side, and very cheap on the short side, with little likelihood of follow-through. Fresh momentum fares much better than stale momentum, especially since standard momentum went off the rails at the start of the current century. Investors will be better off if their strategies avoid stocks with stale momentum and instead rely more heavily on stocks with fresh momentum...

form two additional portfolios within the momentum portfolio:

Stale momentum portfolio. We select the 20% of stocks with the most extreme performance in the same direction that we used for momentum selection in the 12 months preceding the last year. The stocks in the long portfolio are among the 20% best performers in the previous 12 months; the stocks in the short portfolio are among the 20% worst performers in the prior 12 months. As such, each portfolio consists of only about 4% of the stocks in the market...

Fresh momentum portfolio. We select the 20% of stocks with the most extreme performance in the opposite direction to the one we used for momentum selection in the 12 months preceding the last year, and follow the same construction rules as outlined for the stale momentum portfolio...

The cumulative performance for the stale portfolio reaches its performance peak at just over 1% by month 5, much earlier than the standard momentum peak. After this modest peak, the portfolio begins a relentless march downward, wasting all gains by month 10 and losing investors an impressive 8% by month 36...

Fresh momentum shows a much more attractive trajectory. The strategy reaches its cumulative performance peak of about 7% by month 11. Only about half of the gain is eventually ceded through mean reversion; even by month 36, fresh momentum still shows a respectable cumulative gain of almost 4%."

If one added value to a momentum strategy, I wonder how important the question of stale vs. fresh momentum would be. With a value strategy, will you tend to pick stocks with fresh momentum?

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Re: Clippings 2017

Post by twa2w » 29 Oct 2017 13:39

O'shaughnessy uses value strategies combined with momentum. He has tweaked his momentum portion recently so what he has writren in ' what works on Wall street' is likely his former strategy of simple 12 month momentum. Can't recall exactly how he applies momentum now but lots of info on his website.

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Re: Clippings 2017

Post by Taggart » 29 Oct 2017 14:32

Here's Ken Fisher's take on momentum investing from 2013 in "The Little Book of Market Myths"

"There’s a school of investing built around this idea, called momentum investing. Contrary to a vast body of scholarly research (not to mention actual empirical evidence), these folks believe price movement is predictive. They buy winners and cut losers. They look for patterns in charts. But momentum investors don’t do better on average than any other school of investors. In fact, they mostly do worse. Can you name five legendary momentum investors? I can’t think of one.

Stop-losses and momentum investing don’t work because stocks aren’t serially correlated. A price’s movement yesterday on its own has zero impact on what happens today or tomorrow."

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Re: Clippings 2017

Post by deaddog » 29 Oct 2017 17:41

Taggart wrote:
29 Oct 2017 14:32
Here's Ken Fisher's take on momentum investing from 2013 in "The Little Book of Market Myths"

"There’s a school of investing built around this idea, called momentum investing. Contrary to a vast body of scholarly research (not to mention actual empirical evidence), these folks believe price movement is predictive. They buy winners and cut losers. They look for patterns in charts. But momentum investors don’t do better on average than any other school of investors. In fact, they mostly do worse. Can you name five legendary momentum investors? I can’t think of one.

Stop-losses and momentum investing don’t work because stocks aren’t serially correlated. A price’s movement yesterday on its own has zero impact on what happens today or tomorrow."
The Globe & Mails Strategy Lab certainly did not agree with the above.
Most of our so-called reasoning consists of finding arguments for going on believing as we already do.( J.H. Robinson)

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Re: Clippings 2017

Post by Taggart » 29 Oct 2017 18:08

deaddog wrote:
29 Oct 2017 17:41


The Globe & Mails Strategy Lab certainly did not agree with the above.
That may well be, but Ken Fisher started his own investment firm back in 1979 and his dad Phil Fisher was one of the top investors of all time so I guess he does have some experience in momentum. It was Ken who first brought forth the concept of Price to Sales Ratios (PSR) in his book "Super Stocks", so if he saw any merit in combining it with momentum he would of done so.

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Re: Clippings 2017

Post by deaddog » 29 Oct 2017 18:41

Taggart wrote:
29 Oct 2017 18:08
deaddog wrote:
29 Oct 2017 17:41


The Globe & Mails Strategy Lab certainly did not agree with the above.
That may well be, but Ken Fisher started his own investment firm back in 1979 and his dad Phil Fisher was one of the top investors of all time so I guess he does have some experience in momentum. It was Ken who first brought forth the concept of Price to Sales Ratios (PSR) in his book "Super Stocks", so if he saw any merit in combining it with momentum he would of done so.
Ever check out Fishers returns? Not really a market beater, especially the last few years.
Most of our so-called reasoning consists of finding arguments for going on believing as we already do.( J.H. Robinson)

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Re: Clippings 2017

Post by Taggart » 29 Oct 2017 19:08

deaddog wrote:
29 Oct 2017 18:41
Taggart wrote:
29 Oct 2017 18:08
deaddog wrote:
29 Oct 2017 17:41


The Globe & Mails Strategy Lab certainly did not agree with the above.
That may well be, but Ken Fisher started his own investment firm back in 1979 and his dad Phil Fisher was one of the top investors of all time so I guess he does have some experience in momentum. It was Ken who first brought forth the concept of Price to Sales Ratios (PSR) in his book "Super Stocks", so if he saw any merit in combining it with momentum he would of done so.
Ever check out Fishers returns? Not really a market beater, especially the last few years.
Yes, I'm well aware of Ken Fisher's returns. What about it? I don't think any of these portfolio managers out there are a bunch of dummies.

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Re: Clippings 2017

Post by DenisD » 29 Oct 2017 21:49

Research Affiliates wrote:One weakness of standard momentum strategies is that they do not distinguish between stocks as to whether they are early or late in their momentum cycles. We call the first group fresh momentum and the latter stale momentum.
Seeing as I'm a paying P123 customer for the next few weeks, I thought I'd run a few quick backtests combining my US small-cap value screen with fresh and stale momentum. My screen ranks the best value decile by 6 month momentum. I inserted a ranking of 7 thru 24 month momentum before the 6 month momentum.

I ran three rolling backtests starting in 2006. It ran a test every week, choosing 20 stocks and holding them for 26 weeks. The first backtest selected from all stocks in the best value decile (120 or 130 stocks). The second selected from stocks with 7 thru 24 month momentum rank greater than 60. The third was less than 40.

The percentages below are averages of excess returns over the 26 week periods. Benchmark returns were up in 400 of the periods and down in 191 of the periods.

Code: Select all

Mom Rank  Average   Up Mkt Down Mkt
                      400      191
All         1.86%    2.18%    1.21%
>60         2.54%    2.92%    1.72%
<40         2.11%    3.04%    0.14%
As usual, the results were not what I expected. Stale momentum did better than fresh momentum. And both did better than selecting from all the stocks.

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Re: Clippings 2017

Post by deaddog » 29 Oct 2017 22:06

Taggart wrote:
29 Oct 2017 19:08

Yes, I'm well aware of Ken Fisher's returns. What about it? I don't think any of these portfolio managers out there are a bunch of dummies.
Where are you finding info on his performance? The info I have is dated but it shows as of a couple years ago that he was underperforming the market by more than his management fee.

Just wondering why you would be so supportive of an author/ fund manager who has lagged the market so consistently in just about every time period.

I agree that the portfolio managers are not a bunch of dummies. They have managed to market their services and make a very good living, while underperforming the market. :)
Despite the results, Fisher has managed to grow his firm's equity holdings from $5 billion in 2000 to $66 billion at the end of the first quarter of this year

That growth may reflect his skillful marketing. As Meb Faber has noted, “There’s no denying he’s a master of the direct mail and online lead generation process.”
Most of our so-called reasoning consists of finding arguments for going on believing as we already do.( J.H. Robinson)

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Re: Clippings 2017

Post by Taggart » 30 Oct 2017 03:57

deaddog wrote:
29 Oct 2017 22:06

Where are you finding info on his performance? The info I have is dated but it shows as of a couple years ago that he was underperforming the market by more than his management fee.
Perhaps I should have more appropriately used the words past tense. For years, until 2016 I could look at the performance of Ken Fisher's Purisima funds at Morningstar. I'm fairly sure he was benchmarked against the MSCI World index.

At one time in the late 90's they used to have a forum through Forbes where Ken Fisher posted. I was an active member until it eventually folded.
deaddog wrote:
29 Oct 2017 22:06

Just wondering why you would be so supportive of an author/ fund manager who has lagged the market so consistently in just about every time period.
I wouldn't call it being supportive but as long as I can still view their performance, I have to see every few years if anything's changed. These portfolio managers eventually retire, die off, or just disappear from the investment landscape. A constant reminder to myself of how incredibly difficult it is to beat an index, and of course we all have only one investment lifetime, so try and make the best of it.

--------------------------------------------------------


Now getting back to the original subject, I've seen nothing in the past from successful investors like Benjamin Graham, Warren Buffett, Walter Schloss or Peter Lynch where any of them have stated they use any form of momentum strategies. In fact all of them were quite prepared to purchase a stock while scaling down. After purchase it was either continue to hold, or else sell at a preset target.

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Re: Momentum investing

Post by Shakespeare » 30 Oct 2017 08:58

While we are at it:

This portfolio of dividend stocks with momentum has a shockingly good track record - The Globe and Mail (Norm Rothery) (Behind paywall)
The method behind the madness starts by taking a page from Mr. Heinzl's lab book. It sticks to dividend payers and to Canadian dividend stocks in particular. It then focuses in on the largest 200 companies in the land by revenue. It buffs itself up by avoiding stocks with weak and flabby dividend yields while ignoring those with extremely high ones.

But the radioactive fuel that really powers the mechanism comes from momentum. Only firms that have seen their stocks rise from the market's depths to break through the surface and rocket higher get a place in the portfolio. The idea being that they'll continue their upward trajectory for months to come....

The mechanical monster is an unusual dividend portfolio to be sure.

But it has the fuel necessary for it to fly sky high. Mind you, it could also slam into a zombie-infested graveyard leaving wreckage and radioactive waste in its wake. Either way, the ride should be an entertaining one. But don't say I didn't warn you.
I'll let Norm post the stocks if he wants to.
“A wise man should be prepared to abandon his baggage at any time.” -- R.A. Heinlein, The Door Into Summer.

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Re: Clippings 2017

Post by deaddog » 30 Oct 2017 13:19

Taggart wrote:
30 Oct 2017 03:57

Perhaps I should have more appropriately used the words past tense. For years, until 2016 I could look at the performance of Ken Fisher's Purisima funds at Morningstar. I'm fairly sure he was benchmarked against the MSCI World index.
I benchmarked the same fund against the S&P 500 (SPY) which handily outperformed the Purisima Fund.

A constant reminder to myself of how incredibly difficult it is to beat an index, and of course we all have only one investment lifetime, so try and make the best of it.
With only one investment lifetime I want the strategy with the above average returns and the a minimum of risk. I only have anecdotal data but I have managed to do this for the past 15 years. Just lucky I guess.

--------------------------------------------------------

Now getting back to the original subject, I've seen nothing in the past from successful investors like Benjamin Graham, Warren Buffett, Walter Schloss or Peter Lynch where any of them have stated they use any form of momentum strategies. In fact all of them were quite prepared to purchase a stock while scaling down. After purchase it was either continue to hold, or else sell at a preset target.
There is nothing wrong with value investing and it will perform quite well as demonstrated in the Strategy Lab.

I keep going back the G%M Strategy Lab because of my conformational bias. (I ignore the articles that prove that momentum investing doesn't work :) )

The strategy lab trades were made in real time and over a period of 5 years (granted during a bull market). There was no opportunity to fit data to prove a theory. Momentum was the clear winner.

My own experience with momentum investing is that my strategy took me out of the market during the financial meltdown, and has given me double digit returns since then.
Most of our so-called reasoning consists of finding arguments for going on believing as we already do.( J.H. Robinson)

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Re: Clippings 2017

Post by NormR » 30 Oct 2017 13:30

deaddog wrote:
30 Oct 2017 13:19
The strategy lab trades were made in real time and over a period of 5 years (granted during a bull market). There was no opportunity to fit data to prove a theory. Momentum was the clear winner.
There wasn't an explicit momentum portfolio. A growth one yes, but no momentum. IIRC, the growth portfolio was relatively low turnover.

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Re: Clippings 2017

Post by deaddog » 30 Oct 2017 16:59

NormR wrote:
30 Oct 2017 13:30
deaddog wrote:
30 Oct 2017 13:19
The strategy lab trades were made in real time and over a period of 5 years (granted during a bull market). There was no opportunity to fit data to prove a theory. Momentum was the clear winner.
There wasn't an explicit momentum portfolio. A growth one yes, but no momentum. IIRC, the growth portfolio was relatively low turnover.


I looked up the definition of growth and momentum investing. One seems to be based on fundamental analysis and the other on technical analysis.

With the returns achieved I'm guessing that the stocks in the portfolio would fall into both categories.

I'm not a subscriber to the G&M and wasn't able to follow closely. I was mostly interested in the results as it showed that index investing was the least efficient method of employing investment capital. It also reinforced my belief that investing in stocks that are increasing in price is a viable strategy.
Most of our so-called reasoning consists of finding arguments for going on believing as we already do.( J.H. Robinson)

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Re: Clippings 2017

Post by Taggart » 31 Oct 2017 07:57

twa2w wrote:
29 Oct 2017 13:39
O'shaughnessy uses value strategies combined with momentum. He has tweaked his momentum portion recently so what he has writren in ' what works on Wall street' is likely his former strategy of simple 12 month momentum. Can't recall exactly how he applies momentum now but lots of info on his website.
O'Shaughnessy has been using momentum as part of his strategy since his first book came out over twenty years ago. Are you seeing any evidence outperformance by him using momentum in his funds, because I'm certainly not, after looking at his ten year returns?

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Re: Momentum investing

Post by DenisD » 31 Oct 2017 12:24

I've been running 3 O'Shaughnessy type screens for 10 years or so. 2 outperformers and 1 underperformer. The underperformer is the one that uses momentum. But I have high hopes for the future! :)

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Re: Momentum investing

Post by DenisD » 31 Oct 2017 19:40

I thought I'd develop a screen based on the article NormR published in the Globe yesterday. Shakespeare quoted it in this thread yesterday.

The stock universe is all Canadian stocks, except income trusts, with yield greater than zero, price greater than one dollar and minimal liquidity. Limit that universe to the top 200 stocks by trailing 12 month sales. Then select the 100 stocks with dividend yield rank from 45 through 95. Finally, buy the 10 stocks with the highest 52 week price gain and hold them for 52 weeks. Slippage was 0.35%/trade.

Here is the P123 code for that screen:

Code: Select all

(! Universe(CanadaTrust)) and (Close(400) != NA) and Yield > 0
Close(0) > 1 and AvgDailyTot(20) > 50000 and AvgDailyTot(20,20) > 50000 and AvgDailyTot(20,40) > 50000
FOrder("SalesTTM",#Previous,#DESC) <= 200
Between(FRank("Yield",#Previous,#DESC),45,95)
I tried a few dividend yield rank ranges with backtests from January 20, 2006. 45 through 95 gave a 19%/year return, 13.7% better than XIC. I thought that was good enough to go with. So I used that with three more backtests starting in January, May and September of 2006. Day 25 rather than 20. And I backtested my Canadian small and large-cap screens over the same date ranges.

Here are the results:

Code: Select all

Start      Screen       Total Annualized     Excess        Max    
Date       Name        Return     Return     Return   Drawdown     Sharpe
06/01/20   XIC           85.3        5.4                 -48.3       0.36
           NR           676.0       19.0       13.7      -44.7       1.11
06/01/25   XIC           85.4        5.4                 -48.3       0.36
           NR           291.5       12.3        6.9      -53.0       0.73
           SV           693.1       19.3       13.9      -50.3       0.92
           LV           120.6        7.0        1.6      -47.9       0.46
06/05/25   XIC           88.6        5.7                 -48.3       0.39
           NR           220.3       10.7        5.0      -46.4       0.69
           SV           407.2       15.3        9.6      -58.4       0.78
           LV           207.6       10.3        4.6      -49.0       0.72
06/09/25   XIC           86.8        5.8                 -48.3       0.39
           NR           292.4       13.1        7.3      -52.4       0.78
           SV           346.4       14.5        8.7      -55.6       0.76
           LV           233.9       11.5        5.7      -38.1       0.84
XIC is XIC total return. NR is the new screen based on NormR's column. SV and LV are my Canadian small and large-cap screens.

Note the big change in the results of the new screen simply by starting it five days later. But, overall, the new screen does very well and provides fairly consistent results. Of course, I'd do a lot more backtesting if I was putting real money into it. One big advantage of the new screen is you don't need an expensive screener to implement it. One or two free screeners plus some basic spreadsheet knowledge would do it.

Here are today's picks for the new screen:

Code: Select all

Ticker Name                           MktCap     Yield  SalesTTM   Pr52W%Chg
AGF.B  AGF Management                    652       3.9       425        61.2
TCL.A  Transcontinental                 2195       2.8      2036        58.7
PTG    Pivot Technology Solutions        103       6.3      1987        48.3
OSB    Norbord                          4000       5.2      2706        48.1
WJX    Wajax                             448       4.4      1244        47.2
CHR    Chorus Aviation                  1115       5.3      1300        43.9
NFI    New Flyer Industries             3370       2.4      3065        43.1
CWB    Canadian Western Bank            3064       2.8      1078        36.8
MIC    Genworth MI Canada               3599       4.5       925        35.0
MFC    Manulife Financial              51303       3.2     39485        34.0

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