Quantitative Momentum

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Vogel Jack R.. Quantitative Momentum

Preface

Acknowledgments

About the Authors

Part One. Understanding Momentum

CHAPTER 1. Less Religion; More Reason

CHAPTER 2. Why Can Active Investment Strategies Work?

CHAPTER 3. Momentum Investing Is Not Growth Investing

CHAPTER 4. Why All Value Investors Need Momentum

Part Two. Building a Momentum-Based Stock Selection Model

CHAPTER 5. The Basics of Building a Momentum Strategy

CHAPTER 6. Maximizing Momentum: The Path Matters

CHAPTER 7. Momentum Investors Need to Know Their Seasons

CHAPTER 8. Quantitative Momentum Beats the Market

CHAPTER 9. Making Momentum Work in Practice

Appendix A. Investigating Alternative Momentum Concepts

Appendix B. Performance Statistics Definitions

About the Companion Website

Index

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The efficient market hypothesis suggests that past prices cannot predict future success. But there is a problem: past prices do predict future expected performance and this problem is generically labeled “momentum.” Momentum is the epitome of a simple strategy even your grandmother would understand – buy winners. And momentum is an open secret. The track record associated with buying past winners now extends over 200 years and has become the ultimate black eye for the efficient market hypothesis (EMH). So why isn't everyone a momentum investor? We believe there are two reasons: hard-wired behavioral biases cause many investors to be anti-momentum traders, and for the professional, who wants to exploit momentum, marketplace constraints make this a challenging enterprise.

As long as human beings suffer from systematic expectation errors, prices have the potential to deviate from fundamentals. In the context of value investing, this expectation error seems to be an overreaction to negative news, on average; for momentum, the expectation error is surprisingly tied to an underreaction to positive news (some argue it is an overreaction, which cannot be ruled out, but the collective evidence is more supportive of the undereaction hypothesis). So investors that believe that behavioral bias drives the long-term excess returns associated with value investing already believe in the key mechanism that drives the long-term sustainability of momentum. In short, value and momentum represent the two sides of the same behavioral bias coin.

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It is illuminating that Klarman views underlying fundamentals as the only justifiable signal for insight into future stock prices. Price action is “meandering” and meaningless, and efforts to predict the behavior of others are in vain. But Klarman doesn't stop here. He goes on to reject any systematic means of predicting future stock prices:

It is perhaps surprising that Graham, Malkiel, Buffett, and Klarman would be so dismissive of technical analysis, given what seems to be a rich vein of successful historical practitioners and a stack of academic research that is arguably higher than the research that supports the merits of a fundamental, or value investing, approach. Nevertheless, these fundamental investors' views are reflective of those of many in the value investing community and of fundamental practitioners in general. The value investing religion is alive and well.

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