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Momentum - who do you love.
Old 01-29-2008, 08:42 PM   #1
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Momentum - who do you love.

Ok have at it.

heh heh heh - I must confess to Micheal Burke(Investor's Intelligence) in MoneyPaper to pick individual DRIP stocks which turned the corner and may exhibit upward mo. Dividend payers natch. Not cured yet.

Also have peaked at Investment Quality Trends over the years - only when I slip.
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Old 01-29-2008, 08:49 PM   #2
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I can't do momentuim; I am just too picky. I like to have a good idea about where the ground is when I am climbing.

But I did do a trail sub to this guy. He seems sane, reasonably non-promotional, as as I remember he has a very good record over a long period of time.

He combines two evil methods, charting (P&F no less!) and momentum.

The Chartist: About Dan

Here is aquote from Dan's Mutual Fund Letter Intro Page. Low key and I believe verifiable. But the algorithm is mostly proprietary.

"The concept of applying market timing and relative strength to mutual funds was the original idea behind The Chartist Mutual Fund Letter. Simply put, we believed that the basic methodology that was used so successfully with stocks would work just as well with mutual funds, and possibly better.

We established our Mutual Fund Actual Cash Account on August 29, 1988 with $100,000. As of 9/30/05 it had grown to $722,328 an annual average gain of 12.3 percent. There is nothing hypothetical about this account. Not one penny has been added to it over the years. The growth of the account comes strictly from dividends and appreciation, all of which is thoroughly documented."

I didn't do the math, he called this an annual average gain, not a compunded annual gain. So it probably is just the average gain.


Ha
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Old 01-29-2008, 08:52 PM   #3
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unclemick,

Same question as in another thread: does the Fundx subscriber newsletter give their methodology, or just their results (that is, fund picks in their different classes)?
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Old 01-29-2008, 08:55 PM   #4
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Hey, if you want to hear about momentum investing just tune into Cramer each and every night.
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Old 01-29-2008, 08:58 PM   #5
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OK, I am quoting a brief paragraph from Taylor Larimore's Boglehead's Guide to Investing, p. 155:

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Mark M. Carhart conducted a study and subsequently published "On Persistence in Mutual Fund Performance" in the March, 1997 issue of the Journal of Finance. It may be the best and most authoritative study on the subject ever made. He concluded, "Individual funds do not earn higher returns from following the momentum (persistence) strategy in stocks. The only persistence not explained is concentratd in strong underperformance by the worst-return mutual funds. The results do not support the existence of skilled or informed mutual fund portfolio managers."
He continues by citing study after study backing up what this study says.

We'd all love to think that persistence is a great strategy. I am constantly drawn to it, personally. But in the long run, it has been shown time and again that it is not an effective strategy. Stocks showing the best recent performance are usually a worse choice for investment than average stocks. This seems to be a generally accepted fact.
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Old 01-29-2008, 09:00 PM   #6
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I recall somewhere among my core investing library (Armstrong, Bernstein, Bogle, Brennan, Malkiel, Siegel) a study showing that positive montly semicorrelations do exist - but do not overcome the trading and tax impacts... (damn! Must find the reference.)

Interested in opposite data. I do note that there are references in Fundx's site to Journal of Finance articles...
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Old 01-29-2008, 09:09 PM   #7
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Quoting a brief paragraph from Larry Swedroe's The Only Guide to a Winning Investment Strategy You'll Ever Need, p. 15:

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In only one case did the top performers from one five-year period continue to outperform, and the outperformance was less than 1 percent per annum. In five other cases, underperformance of the top funds averaged in excess of 3 percent per annum and in one case approached 6 percent per annum.
It's hard not to believe it when all of my books seem to agree on this point!
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Old 01-29-2008, 09:14 PM   #8
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Again using information from the Fundx website - are you willing to bet your investment returns on a momentum methodology that has a turnover of over 100% / year (trading costs & taxes) and a gross expense ratio of 2.2% that have to be overcome to beat a buy-and-hold strategy? Sure, the subscription newsletter claims to have beaten the S&P500 by several % points over the last 25 years (is there any independent confirmation?), but their actual funds have only been around about six years, and Twaddle posted a graph in another thread that showed Fundx tracking Small Value (I think) very closely.

It may very well be a (going-forward) better methodology (verses looking backwards 20 years from now and noting what did best) - but it may not, and HOW DO YOU KNOW? WHAT INFORMATION DO YOU BASE YOUR DECISON ON?
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Old 01-29-2008, 09:16 PM   #9
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Well, the mutual fund that they put together on this has underperformed it's index (at least the one that Yahoo Finance chose) in 6 out of 8 of the time periods that they report.

How will that help me?

FUNDX: Performance for FUND X UPGRADER FUND - Yahoo! Finance

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Old 01-29-2008, 09:18 PM   #10
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Brief paragraph from Ferri's All About Asset Allocation,p. 10:

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Trend following is also very risky. When technology stocks soared in the late 1990's, people clamored for more. The higher those stocks went, the more the public bought. Investors believed that the future performance of "new economy" stocks would continue to shine indefinitely. The investment experts on financial news shows insisted that the old stock valuation models no longer worked, and that we all needed to adjust to a "new paradigm". Few investors stopped to think that if one sector of the market had tripled in value recently, there was more risk in that sector, not less risk.
He also says on the same page that
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Chasing hot investment performance has become such a large problem that the Securities and Exchange Commission mandates that every mutual fund advertisement that gives past performance must clearly state that past performance is not an indication of future results.
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Old 01-29-2008, 09:21 PM   #11
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Shhh, don't tell anyone about momentum investing or you will ruin it for those of us who use it

Count me in the Millionaire Mommy camp - 21.9% compounded over the last 5 years - down 11% in January, but bounced about 3% the last few days.

Don't have the inclination to calculate the risk adjusted return but I was about 20% international and 20% small cap. Results are really what matters to me and my results have been far better than I was doing before. Would be interesting to see how it compares to something like a slice and dice approach.

I use a system similar to No Load X called Sound Mind Investing Sound Mind Investing They have also started mutual funds using the strategy SMIFX and SMIVX (managed volatility)

Actual performance (what really matters) place No load X as the top mutual fund newletter as ranked by Hulbert and Sound Mind was #3 the last time I checked having beaten the S&P 8 years in a row - Take that Bill Miller

Academic studies of persistence are mixed: Google the subject and you will find many links such as:
http://cisdm.som.umass.edu/research/...ersistence.pdf

The basic concept makes sense to me as an observer of the markets for 20 years. Some styles value, growth, etc. are in favor at different times and the styles persist for a few years. For ex. growth was big in the late 90's and persisted for 3-4 years while people said Warren Buffet was an old fool. Then the crash and value was back in vogue and Buffet was a genius along with a Reit and small cap explosion. I was selling growth funds and buying value and small cap. Of course you miss the actual turning point, but small cap outperformance persisted for several years and I had several funds such as RS Partners that turned in over 100% gains before I sold them. One of the keys is the selling discipline of selling a fund when it drops out of the top quartile.

The costs to me are $9 per month for the newsletter and about 5 $75 trades at Fidelity if I have to sell a fund before 6 months.

I do not see value in individual stock momentum strategies because there is too much stock specific risk vs. mutual funds. Momentum is great for an individual stock until it isn't - then you can drop 40% overnight like CHS, CROX, AAPL last week, etc.
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Old 01-29-2008, 09:22 PM   #12
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Originally Posted by TickTock View Post
unclemick,

Same question as in another thread: does the Fundx subscriber newsletter give their methodology, or just their results (that is, fund picks in their different classes)?
I don't know. I know I don't remember when I was reading borrowed copies from Huel in the 80's.

Being a smart ass - in a nice lefthanded way natch - I consider Bogle's 60/40 'policy porfolio' a momentum strategy. When say stocks are rising you are selling the mo and putting the proceeds into bonds to get back to 60/40. So a 'manual momentum player' might let it go to 65/35 or really greedy 80/20 and then rebalance - assuming he makes to 80/20 without a dip - what's the difference. Get some slice and dicers with many asset classes - is live or memorex, I mean momentum or rebalancing.

Even my old favorite read back in the day Wm Bernstein used to list on Efficient Frontier - What's Cheap from around the world. so what's the time lag from cheap to discovered to having momentum.

The curse of growing up in the PacNW - I tend to see some grey in things - not always black and white.

heh heh heh - then there is the blind squirrel and the acorn problem - the right fund or stock or decade - you might get set for YOUR life but you cannot repeat the strategy/technique or give it away. I'm thinking Warren Buffett here - how many have tryed to copy him. I had a boss with JNJ from the old days - his rocket plant 401k/pension was a nit in comparison.
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Old 01-29-2008, 09:24 PM   #13
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Brief paragraph from Bernstein, Four Pillars of Investing, p. 12:

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This is an essential point that escapes most small investors. Even the world's most sophisticated financial economists occasionally make this mistake: in financial parlance, they "conflate expected returns with realized returns". Or, in plain English, they confuse the future with the past. This point cannot be made too forcefully or too often: high previous returns usually indicate low future returns, and low past returns usually mean high future returns.
OK, I'm done. I'm tired of typing!
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Old 01-29-2008, 09:30 PM   #14
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The costs to me are $9 per month for the newsletter and about 5 $75 trades at Fidelity if I have to sell a fund before 6 months.
Maybe a stupid question... What about ST gains taxes, don't they swamp the return?
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Old 01-29-2008, 09:30 PM   #15
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Old 01-29-2008, 09:37 PM   #16
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Maybe a stupid question... What about ST gains taxes, don't they swamp the return?
No, I only use the strategy in IRA and Roth IRA accounts so taxes are irrelevant. I agree it would not be as tax efficient in a taxable accounts for 2 reasons:

1. The average holding period is about 9-18 months so they are not all long term cap gains.

2. Funds that are hot tend to have high distributions. In December I usually see a big payout which would be taxed unfavorably if not in a tax sheltered wrapper.
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Old 01-29-2008, 09:40 PM   #17
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We'd all love to think that persistence is a great strategy. I am constantly drawn to it, personally. But in the long run, it has been shown time and again that it is not an effective strategy. Stocks showing the best recent performance are usually a worse choice for investment than average stocks. This seems to be a generally accepted fact.
Brilliant. This is the same conclusion that Bernstein came to in the four pillars. Great companies and the hot product dont stay great and hot for long, and while its easy to see who's big today, its almost impossible to say who is going to be the new hot company next year. His conclusion that mediocre or even "bad" stocks (aka "value") would probably never be great stocks, but their imperfections were often more than well priced in and they usually paid a good dividend and gave a fairly decent return to boot.

Best you can do is jump on board when the train starts picking up speed and jump off before it crashes into a bridge abutment.
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Old 01-29-2008, 10:04 PM   #18
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Brilliant. This is the same conclusion that Bernstein came to in the four pillars. Great companies and the hot product dont stay great and hot for long, and while its easy to see who's big today, its almost impossible to say who is going to be the new hot company next year. His conclusion that mediocre or even "bad" stocks (aka "value") would probably never be great stocks, but their imperfections were often more than well priced in and they usually paid a good dividend and gave a fairly decent return to boot.

Best you can do is jump on board when the train starts picking up speed and jump off before it crashes into a bridge abutment.
Makes sense to me, and then there's always a percentage of mistakes as to when to jump. The arguments against persistence are too compelling, and the evidence is overwhelming. It's really, REALLY hard to resist, though. I think it's because as humans, we need to see patterns in things. Sometimes it's just a random walk, with no pattern anywhere.
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Old 01-29-2008, 10:36 PM   #19
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I guess the siren song is someone with 20/20 hindsight, some great data mining, and a fund that starts at the beginning of a bull market.

Reminds me of the email I got from TMF crowing about their new newsletter and fund offerings, noting that since 2003 they had stellar numbers. On looking at the site for the first time since around 1999, I found many of their 'stock collections' from that era to no longer be around, and the performance of many of their late 90's recommendations to be pretty lousy.

Its not even something you can chart or screen with a set of numbers. How would one chart out that the heads of Worldcom, Enron, Tyco, AIG, Brocade and others were all cooking the books and/or engaging in widespread fraud?

The cant-miss, super blue chip, must own stocks that should be in everyones portfolio. At any price. So Fortune Magazine said around 1998.
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Old 01-29-2008, 11:11 PM   #20
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Makes sense to me, and then there's always a percentage of mistakes as to when to jump. The arguments against persistence are too compelling, and the evidence is overwhelming. It's really, REALLY hard to resist, though. I think it's because as humans, we need to see patterns in things. Sometimes it's just a random walk, with no pattern anywhere.
Think about it from a different perspective. Everyone loves to talk about indexing, but a cap weighted index in essence is a momentum strategy. As the price of a stock goes up you buy more. Pure momentum, if financials increase from 15 to 25% of the value of the S&P 500 then you buy more financials. When financials break then you ride it all the way down.

You have a momentum strategy with low fees and no sell discipline. After losing 30% in S&P index funds in 2000-2002 I started looking for a more rational approach with some kind of sell discipline.

It may be that the returns I've experienced are more the result of the overall tilt in the 9 box asset class vs. the actual momentum, but I do not quibble with the reason while the results have been so good. I may need to adjust in the future, but the strategy was successful with a 12% average gain including the worst bear market of my lifetime so it seems viable to me now.
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