“I contend that financial markets are always wrong…”
—George Soros, The Alchemy of Finance1
Part One of this book leaves us with a central message: Momentum should be considered by all investors. And the great paradox is that faithful value investors—those who are probably the least likely to actually implement a momentum approach—stand to gain the most by complementing their value portfolio with a momentum strategy. Perhaps this is for the best, and is a reason why value and momentum in combination—operating as a system—will continue to provide expected long-term portfolio benefits: Each investment religion is too strict, and thus slow to embrace nonconforming ideas. But assuming we have moved past the religious debate between value and momentum, or at least raised the curiosity level of dyed-in-the-wool value investors, it is now time to get our hands dirty and build a momentum approach that can be used in practice. We tackle this subject by breaking this chapter into the following components:
- How to calculate generic momentum
- Describe how look-back windows affect momentum
- Describe how portfolio construction affects momentum
The remainder of this chapter is dedicated to outlining each of these steps in greater detail.
HOW TO CALCULATE GENERIC MOMENTUM
How do we measure the “momentum” of a stock? The simple method is to calculate the total return (including dividends) of a stock over some particular look-back period (e.g., ...