Quantitative Momentum

CHAPTER 9Making Momentum Work in Practice

“Everyone has a plan until they get punched in the mouth.”

—Attributed to “Iron” Mike Tyson

In the real world, going all-in on quantitative momentum is sure to try the patience of even the most dedicated investor. Almost nobody has the discipline to stick with the program—including us. We don't even invest our own capital this way. But we aren't recommending that investors replace their entire equity portfolio with a high-conviction momentum strategy. Momentum is merely a component of a diversified equity portfolio. And as alluded to in Chapter 4, momentum portfolios are best used in combination with high-conviction value portfolios. The value and momentum combination portfolio shortens stretches of multiyear relative underperformance associated with both stand-alone strategies and allows an investor to stick with an equity investment program. Dedicating oneself to pure value investing or to pure momentum investing is akin to sitting on a one-legged stool. So why not sit on a stool with multiple legs? Identify a great value investment approach; identify a promising momentum investment approach; and combine the two efforts to serve as your all-weather equity portfolio.

A TWO-LEGGED STOOL: VALUE + MOMENTUM

To make the value and momentum combination portfolio more tangible, we examine the approach we use for our own investment capital. We combine the quantitative momentum algorithm outlined in this book with an equally rigorously tested ...