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RVB's Market Musings

What began here as an avenue to interact and learn has far exceeded those goals.

If you are a prospective employer, please consider this site a place where you can see my passion for investing...

Wednesday, April 12, 2006

Value and Momentum

There have been numerous academic studies looking at momentum and value investing. A simple search on scholar.google.com provides quite a few hits. I have spoken before of combining the two to attempt to outperform.

I have a belief, though no statistics to prove it yet, that if one combines a trader-like money management scheme to this strategy, overall portfolio risk would be fairly low, with nice profit results. Here, I am speaking of the "risk" as measured in the classical way that most academics do - standard deviation of returns. We humans like returns because we're greedy, but we don't like to see our portfolios fluctuate wildly because we're fearful. (As an aside I am but a novice to seeing these types of academic research papers, but I do believe that most neglect an entire world of things that people at, say, the old Chicago Research and Trading (CRT) or Turtle Traders, or what many hedge funds know but don't share when it comes to managing risk. Blackjack can teach us much about managing a portfolio, yet it seems to be ignored.)

"So what's my point?" you ask. Well, here's a link on MoneyCentral that gives a momentum with value screen. If it doesn't work, you may need to install the MSN Money Deluxe software.

This type of strategy led me to my Feb. 27th recommendation of GEHL - a recommendation that is up nearly 18% in the 1.5 months since being recommended (and is probably going higher)!

Certainly this strategy isn't without its risks - as would be any momentum strategy. Many shy away from momentum, thinking that it is in fact a dirty word among investing, yet most agree that the strategy works. Pure momentum investing would be too dangerous for my blood, because the people in these stocks have little regard for massive selloffs when times get tough. But when the fundamentals are supporting a stock's valuation, what's not to like?

PS - Kudos to those of you who can guess the stock in the chart above.


At April 17, 2006 7:18 PM, Blogger rvb1977 said...

For those of you who may have caught it, the initial version of this post contained a link, in error, that pointed to a paper which I claimed said that momentum and value were linked. The paper actually tried to show the opposite, though not very well.

My apologies.


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