Momentum - who do you love.

[DJRR]

If you're willing to run a daytrader's account with Level II quotes, or if you happen to be able to afford a Bloomberg, then you can probably make momentum investing work for you.

Or, as Bernstein says, you could get a life.

Or you could pay $10 a month for one of the top rated mutual fund newsletters, spend an hour a month reading it and making the trades, and enjoy the best of both worlds.

The obsessive portfolio checking, CNBC watching, WSJ reading, ER board reading is not required it is just because I like it Yeah that's it

 

[ERD50]

BTW the "No Load FundX newsletter" is one of Hulbert's highest-ranked newsletters:

Nords, I'm not getting something (not unusual). There's that ref to Hulburt, and there's this performance summary, showing FUNDX to mostly underperform the index that yahoo chose (I don't know their index comparison methodology):

FUNDX: Basic Chart for FUND X UPGRADER FUND - Yahoo! Finance

click 'performance' on the sidebar and scroll down:

5, 3, 1 year, 3 month and last Bear AND Bull markets underperformed the index.

Hopefully, that doesn't mean that Hulberts best underperform the indexes! It think it means that their actual mutual fund does not match the performance of their newsletter? Hmmm, if so, why not?

And of course, individuals having some success with individual stocks could always be due to survivorship bias, or maybe they really are just good at it. But that makes it hard to tell if it is reproducible by a group like us. But if their fund looks good, my interest is piqued.

-ERD50

 

[DJRR]

Nords, I'm not getting something (not unusual). There's that ref to Hulburt, and there's this performance summary, showing FUNDX to mostly underperform the index that yahoo chose (I don't know their index comparison methodology):

FUNDX: Basic Chart for FUND X UPGRADER FUND - Yahoo! Finance

click 'performance' on the sidebar and scroll down:

5, 3, 1 year, 3 month and last Bear AND Bull markets underperformed the index.

Hopefully, that doesn't mean that Hulberts best underperform the indexes! It think it means that their actual mutual fund does not match the performance of their newsletter? Hmmm, if so, why not?

-ERD50

I think the real question is Why do they choose to compare this fund to the MSCI EFA which doesn't even have any US stocks. I would guess a US based fund holding positions in dozens of mutual funds would have a fairly large % of US stocks and since international has done better recently they would underperform.

I find that the ratings people have a hard time with these types of funds. For the one I follow, Morningstar lists it as a Mid Cap Growth fund and it is mediocre in the category. Lipper lists it as a Multi Cap Core and it is in the top 6% of that category.

I imagine that Morningstar puts the underlying funds in an xray and since it tilts toward Mid Cap that is how they categorize it. This is not really fair since there is a large slug of international, small cap and large cap. It is not accurate to say "on average" it is midcap

Lipper has the multi cap category, which is more accurate but not necessarily more useful.

I guess the only truly accurate way to do it would be to take the actual weighted allocations and multiply by the relevant index and sum the total. This would be the unique comparison index for this fund. Then you could see if it was truly outperforming in its investment choices or just a different form of asset allocation.

Or you could be like me and not worry too much about it. It has certainly outperformed the index mix of 80% S&P and 20% EFA that I probably would have been in anyhow.

 

[ERD50]

I think the real question is Why do they choose to compare this fund to the MSCI EFA which doesn't even have any US stocks.

...

I find that the ratings people have a hard time with these types of funds. For the one I follow, Morningstar lists it as a Mid Cap Growth fund and it is mediocre in the category.

Or you could be like me and not worry too much about it. It has certainly outperformed the index mix of 80% S&P and 20% EFA that I probably would have been in anyhow.

I agree that just looking at holdings, MSCI EFA doesn't make much sense as a comparison. I'm guessing their computers did a match to volatility. Looking at dips and peaks, MCSI EFA and FUNDX look like twins separated at birth:

Quotes for FUNDX - Yahoo! Finance

In every time period I chose, FUNDX underperformed both EFA and IWR (Russell Mid Cap). And remember that those charts don't include dividends, which are currently 2.53% for EFA, 1.37% for IWR, and 1.25% for FUNDX.

If you go to yahoo's 'historic prices' they adjust for dividends. Going for max common time frame (JUN 19,2002 to today): EFA up 2.13x; IWR up 1.84x, and third is FUNDX at 1.59x.

FUNDX does outperform S&P500, but with considerably more volatility. An 80% S&P and 20% EFA comparison really isn't 'fair/useful' either.

Also, for taxable accounts, Turnover for EFA is just 5%, IWR 19% and FUNDX is 112%.

Just by eye, that IWR looks considerably *less* volatile than FUNDX, even while outperforming it. So while this momentum strategy doesn't look bad or crazy (like so many 'strategies'), I'm having trouble seeing why one would not just go with an index of comparable historic volatility, or blend a few of them to tailor the risk/reward, and maybe even get a touch of non-correlation to boot? I guess it just goes back to my earlier point - on a 'risk adjusted' basis, is momentum really so great?

I'm just not seeing the attraction? -ERD50

 

[twaddle]

I guess it just goes back to my earlier point - on a 'risk adjusted' basis, is momentum really so great?

Did you read the paper I linked to earlier? The answer is a qualified "yes."

Momentum strategies had excess returns even after accounting for the traditional three factors of risk: beta, size, and value.

 

[ERD50]

Did you read the paper I linked to earlier? The answer is a qualified "yes."

Momentum strategies had excess returns even after accounting for the traditional three factors of risk: beta, size, and value.

This paper?

SSRN-Are Momentum Profits Robust to Trading Costs? by Robert Korajczyk, Ronnie Sadka

Skimmed it - for me the proof of the pudding is in the tasting. If the answer is a qualified "yes.", then why doesn't FUNDX achieve excess returns on a risk adjusted basis?

Should be a cake-walk.

-ERD50

 

[ERD50]

Let me put that another way - I would not be surprised that a momentum strategy could provide superior returns. But as a practical matter, how can I profit from this?

If I trade individual stocks, my choices and timing can wipe out or amplify any real benefit. A fund manager should be able to this on a large sample-size scale. So maybe FUNDX isn't doing it well. Somebody must? Who?

-ERD50

 

[free4now]

When I first got started with managing my investments, I used the Doug Fabian plan. Basically you buy when the equity crosses above it's 40 week moving average, and sell when the price goes below the 40WAR. The claim was that it gave a little better results than buy and hold with less downside risk. Over most periods in history it looks great when you backtest it.

The devil is in the details though... if you end up getting a sideways market you'll get "whipsawed" in and out repeatedly, and the transaction costs will eat you alive (if the human costs of staying glued to the ticker don't get you).

The other issue is that if you don't buy or sell at exactly the right points because you are out living your life instead of glued to the trading system, it always works out against you. I suppose these days it wouldn't be too hard to set up automated trading systems to [-]burn through your money[/-] make the trades for you, but where's the fun in that?

 

[twaddle]

Let me put that another way - I would not be surprised that a momentum strategy could provide superior returns. But as a practical matter, how can I profit from this?

If I trade individual stocks, my choices and timing can wipe out or amplify any real benefit. A fund manager should be able to this on a large sample-size scale. So maybe FUNDX isn't doing it well. Somebody must? Who?

Well, I think there are several different questions here.

1) Is FUNDX an "uneducated" choice? Is it for "high-schoolers", while the dominant approaches espoused here are for "MIT'ers?" I think the answer is obviously "no."

2) Do momentum strategies work? I think the academic answer is clearly "yes."

3) Do all momentum strategies work all the time? I doubt it.

Try reading at least part of the paper I ref'd. It gives both a nice overview and a nice summary. For example, most of the excess returns from momentum apparently come from shorting. So a fund that only goes long isn't going to exploit the full effect.

 

[cute fuzzy bunny]

1) Nobody made any grade level claims for any particular approaches.

Help me out here: what is the dominant approach espoused here again? You never did answer that question. There is probably nearly zero overlap between the investing strategies and holdings of myself, Nords, Rich, Martha, Brewer, Unclemick, Haha and others. So how do we all get together to formulate this dominant approach and espouse it when none of us are marching to the same tune?

I think what we're collectively in disagreement with are "get rich quick" schemes, approaches that offer far more risk than they let on to, and the people trying to push those schemes.

2) I think the academic answer is "sometimes, under some conditions, with a level of risk easily equaling the reward, since this is still a 'no free lunch' world".

3) No.

Addendum: so basically it is only by taking on a much higher risk strategy involving shorting (where you can lose more than everything and end up owing money) that there is a benefit created? Obviously a risk level some people might choose to adopt, but seems tough to see why a well financed early retiree would find this a good plan.

 

[twaddle]

Help me out here: what is the dominant approach espoused here again? You never did answer that question.

Ah, poor Bunny. I'm sorry I didn't respond to your question.

I did say "approaches," didn't I?

But take a look at the beginning of this thread in which a "scientist" quotes some dogma from the Bernstein bible that doesn't even address the topic. And then some bunny shouts out with a "Yeah, sister! Amen!"

Or something like that.

I'd say that respresents one of the dominant approaches here. You know, the idea that "momentum" is bad. One of the moderators here even used the past 90-day performance of a fund to prove it.

Is an approach bad simply because it is dominant here? No.

In an approach bad simply because it doesn't fit the conventional wisdom of Bernstein et al? Or the "cigar butts" of Graham and Dodd? Or fundamental analysis? Or CFB's random made-up strategy du jour? No.

I'd rather learn how somebody chose their investing style. Thanks in advance for tolerating such discussions.

 

[ERD50]

Well, I think there are several different questions here.

1) Is FUNDX an "uneducated" choice? Is it for "high-schoolers", while the dominant approaches espoused here are for "MIT'ers?" I think the answer is obviously "no."

2) Do momentum strategies work? I think the academic answer is clearly "yes."

3) Do all momentum strategies work all the time? I doubt it.

Try reading at least part of the paper I ref'd. It gives both a nice overview and a nice summary. For example, most of the excess returns from momentum apparently come from shorting. So a fund that only goes long isn't going to exploit the full effect.

Twaddle, can you answer my basic question above: 'as a practical matter, how can I profit from this?'.

Academic studies are all well and good, and can make interesting reading if I'm in the mood. But my question stands. And further...

I'm pretty sure that the cream-of-the-crop, well educated active fund managers and their teams have absorbed every word of all those studies. If we take your 'unequivocal yes' on momentum plays, it seems there should be a group of active fund managers putting this to work and providing superior risk-adjusted returns. And they should be smart enough to know which strategies work in which markets. Where are they? Has there been a thread recently that has highlighted superior risk-adjusted funds with a long history? If so, I'd like to review it - I'm always looking. The FAIRX fund looks pretty good in just about any time frame:

FAIRX: Basic Chart for FAIRHOLME FUND - Yahoo! Finance

They hold just 25 stocks, I do worry that w/o much diversification, they could just be wrong for a stretch?

Or does 'not all momentum strategies work all the time' require knowing in advance what the market conditions will be? Now we are back to predicting the market, with the risk of being wrong.

I hope I'm not coming off too negative here. I'm simply doing the 'I'm from Missouri - show me' thing. I'd like nothing better than to be shown a strategy with a history and that can be replicated that has a significant advantage over an index blend of similar volatility. Ideally, in a fund that I can buy. Even if it involves high turnover - that can be fine for a tax deferred account.

Just so you understand that I'm not opposed to going outside the 'index box', I've been using a 'strategy' on almost half my portfolio. But if ten people did it, they might come up with ten different results, so it's not something that is so easily replicated. And it has underperformed in some market conditions. So it's not something I'd 'shout from the rooftops'. But I'm learning, and the conditions that it underperforms on appear to be obvious from the market conditions at the time (not needing to be predictive) - so now, if conditions look poor, I just throw the money back in SPY (my benchmark for this approach) until conditions change. I'll let you knoe when I have a 20 year history with it

-ERD50

 

[twaddle]

Twaddle, can you answer my basic question above: 'as a practical matter, how can I profit from this?'.

I'll give you one answer and then a question for you.

Answer: A guy named Cliff Asness writes about this stuff a lot. He also runs some funds. Invest in one of his funds.

Question: It's also well accepted that small-cap value out-performs some other asset classes, right? Can you tell me the best way to profit from that idea? And explain why small-cap value has performed so poorly recently?

There are lots of different implementations of ideas. And not all ideas work all the time. The academics just tell you what works pretty consistently, ideally across different time frames and world markets.

 

[cute fuzzy bunny]

I did say "approaches," didn't I?

Very good. What are these dominant "approaches" then. I dont see them.

But take a look at the beginning of this thread in which a "scientist" quotes some dogma from the Bernstein bible that doesn't even address the topic. And then some bozo shouts out with a "Yeah, sister! Amen!"

Shall we not avoid name calling? On one hand you seem to despise what you perceive to be a lack of open mindedness, on the other people who say things that you dont like are "scientists" and bozos?

I'd say that respresents one of the dominant approaches here. You know, the idea that "momentum" is bad. One of the moderators here even used the past 90-day performance of a fund to prove it.

I dont think anyone has said it is "bad", just pointed out some potential issues and the need to risk adjust the strategy.

Is an approach bad simply because it is dominant here? No.

Here we go again. Which is/are the "dominant" strategies here? The ones that dont introduce excess risk and complete loss of principal without a likely and offsetting gain? The ones with tons of data backup and a load of well respected experts behind them?

When there are a dozen completely different ways to approach something, can one claim any level of "dominance" is in existence?

Or CFB's random made-up strategy du jour?

My strategy has made me more money than any momentum strategy I've seen so far. Want to buy my newsletter?

I'd rather learn how somebody chose their investing style. Thanks in advance for tolerating such discussions.

Do go on with your crusade to invent problems that arent there in an effort to explain why you dont like it here.

 

[Marquette]

I can see the value of momentum investing. Say that I'm buying mutual funds... while we know that funds do not outperform their index over time, and we can assume that an outperforming fund will underperform as it reverts to the mean, we also know that those aren't instantanious events. A fund manager gets hot for a while and then cools off as they make bad picks or as money floods into said hot fund.

So, you ride a hot fund / stock up and then jump on the way down.

In a sense, I can reconcile this internally with efficent market because a momentum investor is accepting a higher risk.

Further, it strikes me that rebalancing, as has been pointed out, is similar... it just happens at such a pace that it looks no more like momentum investing than a glacier looks like a river.

I also know that this doesn't fit my style at all. I rebalance as percentages change to keep me in line with my target risk / reward. That's about as active as I want to get at this point... I have a high confidence that I'll get to where I want to be on my pace and I see no reason to accept more risk or invest more time in hopes of getting there faster or with more.

Anyway, just my opinion. It seems viable, it seems like it might make up a great component of someone's portfolio if they chose, and it seems like it's not for me at all. But hey, the closest thing I come to being an expert with money is that I can spin a quarter really fast if I flick it right.

 

[bssc]

Hi all

I have deleted all posts containing personal attacks and off topic responses. Please stick to the subject at hand

Thanks

 

[brewer12345]

I am all for spirited debate, but when the monkeys start flinging poop at each other, its time for a cool-off period.

 

[ERD50]

I guess I missed the 'fun' while I was out shoveling the walk. Oh well, Im just trying to find out if there is a reliable investment out there that performs better than S&P500 with less or equal volatility. Boring ol' me.

1) Is FUNDX an "uneducated" choice?

I don't understand. What are you asking? (ignore it if this somehow became controversial?).

I'll give you one answer and then a question for you.

Answer: A guy named Cliff Asness writes about this stuff a lot. He also runs some funds. Invest in one of his funds.

A little googling says this guy runs a hedge fund. Can I even access performance reports? Putting a bunch of money in the hands of a hedge fund operator does not match my idea of meeting the risk of an index fund. I'm going to put that in the 'not practical' category.

Question: It's also well accepted that small-cap value out-performs some other asset classes, right? Can you tell me the best way to profit from that idea? And explain why small-cap value has performed so poorly recently?

Define 'out-perform'. I think you are ignoring the 'risk adjusted' point I keep making. Say that I blend the AA of a small cap index down with fixed income so that the dips are no worse than the S&P. Do I outperform then? IIRC, it should outperform slightly, the 'alpha' should be higher, right?

After that thread where I outlined the dips in net worth that one would historically experience over just 15 years, even with a 50/50 AA and a 3.5% SWR, I'm a bit sensitive to taking on more volatility. If one is in the accumulation phase, and has decent job security, it probably makes sense to go more aggressive. But it's still not apples-to-apples.

There are lots of different implementations of ideas. And not all ideas work all the time. The academics just tell you what works pretty consistently, ideally across different time frames and world markets.

So, can anyone please point out some publicly traded mutual funds that achieve the goal of consistently outperforming indexes on a risk adjusted basis?

-ERD50

 

[twaddle]

ERD50, please define "risk adjusted." That used to mean adjusted for beta. These days it means adjusted for the three factors of Fama & French. The paper I referenced *explicitly* and *repeatedly* talks about momentum in terms of a source of excess returns not explained by the F&F three factors.

In other words, momentum is an accepted independent "fourth factor" used to explain returns.

I'm not an expert on mutual funds, but most of them don't carry short positions. That's usually the purview of hedge funds. But there are some you can access. Even Vanguard recently introduced a "market neutral" fund that exploits momentum.

 

[ERD50]

ERD50, please define "risk adjusted." That used to mean adjusted for beta. These days it means adjusted for the three factors of Fama & French. The paper I referenced *explicitly* and *repeatedly* talks about momentum in terms of a source of excess returns not explained by the F&F three factors.
...

I'm not an expert on mutual funds, ...

You keep referencing the papers and theories. That's great, but what I'm interested in is seeing some tangible results based on those theories. That's why I keep asking about a public mutual fund with a history that follows this model. That's something we can review. That's something that people on this forum could easily invest in if it looks attractive.

And there are funds that hold shorts, and some that are nothing but shorts. The fund can do it as long as it is listed in their prospectus. I'm pretty sure you can even hold these short funds in an IRA, even though you can't short a stock directly in an IRA.

On Fama & French 3 factors (from wiki):

The three factor model is gaining recognition in portfolio management. Morningstar.com classifies stocks and mutual funds based on these factors. Many studies show that the majority of actively managed mutual funds underperform broad indexes based on three factors if classified properly. This leads to more and more index funds and ETFs being offered based on the three factor model.

So, it looks like morningstar picked MSCI EAFE as the index to measure FUNDX against - so it must be the appropriate index for FUNDX comparisons, yet FUNDX underperforms.

Now, my personal definition of 'risk adjusted' is which investment will maintain the 'highest worst case lows' for a 50 year portfolio. Too much fixed income is risky - it does not keep up with inflation; investments with big negative swings bring lower-lows.

If there does not seem to be a mutual fund for this, we might as well pick up the subject in the 'Stock Picking' forum.

-ERD50

 

[twaddle]

Good question, but not one I can answer. I'm not a momentum fund investor, but I was hoping that we could hear from a few since it is an interesting way to invest.

I did invest in houses and dot-coms during the bubbles. Does that count?

Several people have indicated that they consider momentum investing a "risky" strategy. I was merely pointing out that the academic evidence doesn't support that idea. The strategies they looked at aren't making money due to added volatility or any other standard metric of risk.

It's obviously an active strategy. It incurs trading costs. If you buy a fund, those costs will be on top of managment fees. I would be surpirsed if you could buy a fund that makes enough from the strategy to clear those cost hurdles.

But that doesn't mean that people can't do it on their own. Or with the help of a newsletter.

 

[REWahoo]

...You know, the idea that "momentum" is bad. One of the moderators here even used the past 90-day performance of a fund to prove it.

Hey Twaddle, I don't see where anyone else posted a 90 day perf chart on momentum funds, so it would appear statement above is in reference to my post here.

To say that I posted the charts to prove momentum investing is bad is, well it just ain't right. I wasn't trying to prove anything. My post was in response to another poster who inquired about returns since Oct. and Nov. Nothing in that post that I can see about the relative merits of momentum investing unless you are referring to my comment about volatility, which I clearly pointed out isn't necessarily a bad thing. For example, the fine folks who market Tide Laundry Detergent and Pepto Bismol probably enjoy the boost in sales...

 

[twaddle]

Sorry, Wahoo, I did take that a bit out of context. Probably the "high school vs MIT" stuff too. I got carried away by the momentum of the discussion.

 

[REWahoo]

I got carried away by the momentum of the discussion.

NBD.

 

[ERD50]

I would be surpirsed if you could buy a fund that makes enough from the strategy to clear those cost hurdles.

That's the key. You are probably right, I was hoping you were wrong.

But that doesn't mean that people can't do it on their own. Or with the help of a newsletter.

Also correct, but it is tougher for many people (myself included) to put their faith in a newsletter writer. Even if they are right for a long time, one worries that they will revert to the mean, possibly at a very bad time. If you are comfortable with it, and seeing good results, that's great.

Several people have indicated that they consider momentum investing a "risky" strategy.

I guess you could look at it like this - if you pick an index as your benchmark, any investment outside that index runs the risk of under-performing (and over-performing obviously) the benchmark. For many of us, portfolio survival is more important than dying with a big portfolio. So under-performance is the concern.

But if you are saying that a fund with about 1% point higher fees than an index will have trouble outperforming the index, that doesn't sound like a lot of upside. Of course, if you are comfortable with the approach, can minimize trading and tax expenses and actually realize a 1% boost consistently for many years, that will be sizable.

So I see where there is potential and it could be of interest to the stock pickers, but not enough for me to say, 'hey everyone, ditch your index funds and go momentum'.

-ERD50