For the past nearly eighteen years, I have been a trend and momentum investment manager, and it has served White Oak and our investors well. Our success is especially evident this year with outsized returns in a market that has scared many into thinking that it just can’t be. But it can be, and momentum following has carried us well.
There was recently an article in the Wall Street Journal that pointed out all the alleged bad points of momentum investing and urged investors not to be a “momo.” The author used Tesla as the current mania stock that everyone wants to own. I think there is a real lack of understanding in the public about what momentum investing really is.
The chart above shows a momentum model that goes back to the 1920s. The data is pulled from the Ken French Data Library. This series is constructed by taking twelve months of price data and ignoring the most recent month. It is a simple model using only price data. Price is what drives the buying and selling decisions of a momentum investor.
Momentum has been a very good investment factor for a long time, which is why we have chosen to use it for our client accounts all these years. I believe that, had we been using it from 2000-2003, we would have avoided substantially more of the dot com crash devastation. Lesson learned. Luckily, we did begin to use it in 2003 and recovered much faster as a result. We recovered well in 2009 and now again in 2020. While momentum hasn’t outperformed all the time, it has survived wars, recessions, and all types of markets.
With trend and momentum investing, the issue comes in not getting rid of a stock when it begins to crash or grow weak. It requires you to be willing to admit when you are wrong and move on. The momentum strategy pictured above relentlessly rotates out of weak stocks every month. That is the real key. We need to be willing to buy the very strong stocks to make a momentum strategy work! We diversify your holdings just like a value, growth, low-volatility, or income investor would do. You may wind up with the current mania stock in your portfolio, but you are also going to wind up with a lot of other strong momentum names.
Momentum will go through ups and downs in the future, and there will be years when you really wonder if it has stopped working. But value does the same thing. Value investors have been underperforming for years. However, it’s rare to read articles about not being a “val-val” investor. For whatever reason, value has been deemed intellectually superior to momentum. We obviously disagree and will move to value investing when those stocks become the favored asset class again. For now, the strength remains in domestic equity and large and midcap growth stocks; technology and consumer cyclical sectors are strongest, followed by US preferred stocks, convertible bonds, and precious metals.
Monday’s heavy negative activity on the indexes is likely due to the political fight over a potential nomination to fill the vacated seat of deceased Supreme Court Justice, Ruth Bader Ginsberg, and the fact that this fighting has taken the discussion focus away from efforts to reach another Coronavirus stimulus bill for Americans. If our elected representatives can get a good bill approved, then the markets should react positively.
Please call me with any questions or if you would like to schedule an appointment.
