Vamos devagarinho
Introduction
Momentum is the phenomenon that securities which have performed well relative to peers
(winners) on average continue to outperform, and securities that have performed relatively
poorly (losers) tend to continue to underperform.
2
The existence of momentum is a well-established empirical fact. The return premium is evident
in 212 years (yes, this is not a typo, two hundred and twelve years of data from 1801 to 2012) of
U.S. equity data,3
dating back to the Victorian age in U.K equity data,4
in over 20 years of outof-sample
evidence from its original discovery, in 40 other countries, and in more than a dozen
other asset classes.5
Some of this evidence predates academic research in financial economics,
suggesting that the momentum premium has been a part of markets since their very existence,
well before researchers studied them as a science.
However, as momentum strategies have grown in popularity, so have myths around them. Some
of the most common myths are that momentum is too “small and sporadic” a factor, works
mostly on the short-side, works well only among small stocks and doesn’t survive trading
costs. Furthermore, some argue that momentum is best used as a "screen", not as a regular factor
in an investment process. Others will go so far as to say that momentum investing is like a game
of “hot potato”, implying that it isn’t a serious investment strategy, with no theory or reasonable
explanation to back it up.
Frankly, we’re a little irked (if that was not clear) by those who should know better but continue
to repeat these myths, stretching the limits of credulity. In this essay we address and refute these
myths using academic papers (that have been widely circulated throughout the academic and
practitioner communities, have been presented and debated at top-level academic seminars and
conferences, and have been published in peer-reviewed journals) and the simplest data taken
from Kenneth French’s publicly available website, a standard dataset used by both academics
and practitioners. Anyone repeating these myths, in any dimension, after reading this piece is
simply ignoring the facts.
2 The term “relative” is important. Momentum is sometimes confused with trend following — though related, these
are not the same. The process behind momentum is to rank securities relative to their peers; in contrast, trend
following typically focuses on absolute price changes. Unlike trends, which increase exposure during upswings and
decrease exposure during downswings, momentum takes no explicit view on the market trend, but simply ranks
securities relative to each other over the same time period (though in doing so some implicit, net directional market
view may exist). Momentum’s “winners” and “losers” are defined no matter how the market overall is doing. For
example, during 2008 a winner would have only been down a few percent relative to other stocks that on average
were down more than 30 percent. During market upswings, losers would similarly be defined as stocks that were
only up a few percentage points.
3
See Geczy and Samonov (2013) for evidence of momentum in U.S. stocks from 1801 to 2012 in what the authors
call, with some justifiable pride, “the world’s longest backtest”.
4
See Chabot, Ghysels, and Jagannathan (2009).
5
See Asness, Moskowitz and Pedersen (2013).
Fact, Fiction and Momentum Investing – Page 3
Please note, of course, that we make no claim that momentum works all the time. In fact, of late
(this year and the last few years), momentum as a strategy has had a more difficult time. Still, the
fact is momentum is a risky variable factor (as they all are) with an impressive long-term average
return that survives all the attacks (myths) hurled against it. In this essay, we defend momentum,
including its use stand-alone (especially as a substitute for growth investing) and in combination
with value, from these persistent attacks. We feel this, both myth busting and focusing on the
long term, is especially important given momentum's recent performance which only wrongly
reinforces the resilience of its attackers. At the same time, our goal is not to denigrate other
factors, most specifically value. Although we occasionally note the irony that many of the myths
we dispel come from value investors attempting to discredit momentum, even though several of
these myths actually apply better to value investing itself! However, as we’ll show in this essay,
value and momentum work better when used as complements, and it is the combination of the
two we stress and most-strongly recommend. We are fans of both momentum and value but
bigger fans of their combination (and not fans of myths at all).
Now, on to the myth busting.
