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5 Major Takeaways from Top Selling Book – Dual Momentum Investing

It’s an amazing feeling to finish a book, especially one that I started multiple months ago, but I feel like taking this long to read Dual Momentum Investing has really helped me comprehend the material a ton and has made me a much, much better investor.

Throughout the course of the book, I was making a point to write down some major takeaways that I had, so now that we’re at the end, it’s time to share them!

1 – Momentum Investing Has a Strong Track Record 

A lot of people think that momentum investing is some new trend/fad in the investing world…well, hate to break it to you, but it’s actually been around for YEARS!  In fact, over half a century as it was developed by Robert A. Levy in 1967.

When Levy developed momentum investing, he was simply trying to track the “relative strength” of a stock which you likely have referred to as RSI, or Relative Strength Index.

  • His first study was using 5 years of 625 stocks.  The stocks that historically had been in the top 10% of price performance achieved a 9.6% return over a ½ year period.  The stocks that were the 10% weakest performers on a price performance basis achieved a 2.9% return over that same ½ year time period.
  • Levy did another study from 1965-1989 and the data said that “winning” stocks over a 6-12-month period would outperform “losing stocks” over that same 6-12-month period, for the next 6-12 months, by an average of 1%/month.
  • Then, he decided to add another 9 years of data, 1990 – 1998, and found the same exact results – winners will outperform by 1%/month or so over the losers.

So, basically, he was able to find out that by simply selecting stocks that were on a tear lately, he would likely be able to continue to realize some of these massive price runups.  To dumb it down, he felt that it was more likely that something that was going up was going to keep going up rather than something dropping like a rock then going back up (value investing).

Now, I say that’s value investing, but there’s obviously a ton more to it than just buying a stock that has dropped in price.  Just because airlines are super cheap during COVID doesn’t mean they’re a value – their revenues are still down about 70% from last year yet the share price isn’t down that far, so maybe you could argue they’re even more over-valued!  But that’s neither here nor there.

There was another study done in 2012 that went all the way back to 1801 and it showed that if you took the top 1/3 of companies with the highest price momentum and compared them to the bottom 1/3, the top 1/3 had an outperformance of .4%/month.

Do you know what .4%/month is? It’s drastic

At the end of the day, there’s been a lot of very simply studies (easy for me to say – maybe I should say easy in concept) that statistically prove that momentum investing works.  I wasn’t sold at first, even after reading the chapter, but my summary might help get you more on board if you’re not quite there.

Even if you do buy in that it works, the next logical question is to ask why it works, right?  Well, let me tell you!

2 – Momentum Investing Works Because of Bad Investors 

Yeah, I said it – momentum investing works because of bad investors.  You see, so many of us have behavioral finance tendencies that keep us from making good investing decisions. 

It could be anything!

Loss aversion (you feel worse about a 5% loss than you feel great about a 5% gain) or maybe even confirmation bias where you have an opinion going in and you can’t shake it, no matter what information you can find.

For me, confirmation bias was a really tough one that I had to overcome.  I was a huge sucker for price targets and analyst ratings as a new investor because I would think, “well, the experts say it’s undervalued, and they know more than me, so I am going to buy”. 

While I do think that makes sense, I also think that there’s a lot in this world of investing that isn’t making perfect sense, so we HAVE to do our own analysis prior to investing in any company.

For instance – if you look at biotech stocks right now, you will likely see that tons of them are super undervalued and major buys…but are they?  Or is it just an industry bias?

It’s not for me to say, but I think that you need to do your own research. 

But guess what – people don’t.

People aren’t rational investors. 

People will buy high and sell low.  It’s human nature.  We do the exact opposite of what we want to do.

I have often talked about how I know people that sold in 2008 when they lost half of their 401k and then chose to never reinvest but guess what – by 2018 the market was more than double where it was PRE-DROP and QUADRUPLE where it was post-drop. 

So, yeah, they really messed up – and it was because of their behavioral finance tendencies.  If you think that you’re immune to these then I promise that you are not.

I promise that I am not and I’m even writing about them!  I still get caught up in FOMO all of the time…like way too often.  But I’m better than I was last year and hopefully I’ll be even better.

Investing for yourself is about learning from your mistakes – momentum investing is about preying on the mistakes of others.  We can take these mistakes and capitalize on them.

When others pile onto a stock that has runup because they have FOMO like some idiot I mentioned previously (me), then you can get in (or stay in) on the name and let it run up more because of the strong price momentum!

Sure, it’s not that easy, but that’s the simple concept.  To actually put it into use and be effective, you need two major things to be in your favor – absolute momentum and relative momentum!

3 – Absolute Momentum + Relative Momentum is the Major Key

This is the part of Dual Momentum Investing where things start to become a little more in the weeds!  That might stress you out as an investor but I am a nerd, so I loved it!  If you don’t want to get in the weeds, then you can read my summary for the highlights ( and if you do want to get in the weeds, go buy the book!

A lot of investors that partake in Momentum Investing currently use relative momentum, which is where you’re comparing the price share appreciation of a stock vs. a benchmark, say the S&P 500. 

So, if a company has increased their share price by 10% over the last 12 months and the S&P is at 5%, then the company would have a positive momentum relative to the S&P, hence relative momentum.

Antonacci wanted to combine this with absolute momentum where you’re literally just trying to see if the share price is appreciating at all over the T-Bill rate.  So, anything positive above the T-Bill rate then would be a positive absolute momentum.

Antonacci will combine both of these strategies to then find stocks that are not only outperforming their peers, but also make sure that they’re going up in general, and if they’re not, then he would consider moving to T-Bills only for a very, very short period of time!

Personally, I love this strategy but I think it seems super easy and honestly, I was pretty skeptical of the results.  Of course, if it didn’t work then he wouldn’t be writing a book about it lol, so I knew it had to work, but it just made me raise an eye when I was reading it.

4 – We Don’t Need No Stinkin’ Bonds

For someone like me that absolutely hates bonds, this title really stood out to me.  Now, I’ll say that bonds have their place and I hate them because I am very young so locking part of my portfolio into a 2% gain is not something that sounds desirable to me.

And honestly, it shouldn’t be desirable for you either, even if you’re about to retire – you still likely have 20+ years of life!  It’s not time to get conservative now!

Chances are, some of you are going to really disagree with me on this stance, but what if Warren Buffett felt the same way?

“They are among the most dangerous of assets.  Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal…. Right now, bonds should come with a warning label.”

Still feel this way?

The reason that Antonacci says that we don’t need bonds is because anytime that the absolute momentum is negative, meaning that the share price is on a downwards trend over the last 12 months, then we can put our money into a T-Bill for a short amount of time.

Personally, if you wanted to put your money into a bond fund for a few months, I think that would be fine, but he is more so advising against the long-term performance of bonds in your portfolio.

Do you know the average bond return (after inflation) since 1900?  It’s 1.9%.  The average performance of the stock market in this timeframe is 6.5%.

Investing $1 in bonds and $1 in stocks in 1900 would give you $8.39 in bonds and $1,231.70 in stocks.

Still thinking you need bonds?

5 – Global Equities Momentum is a GEM

This one is MY FAV!

Global Equities Momentum, or GEM, is Antonacci’ s tangible method to decide where your money needs to be invested to take advantage of what he deems the perfect Dual Momentum Investing strategy…and honestly, I don’t disagree with him!

I recommend that you checkout the full summary but essentially you are just comparing a couple of different things to determine where to invest your money:

  • Is the All World Index > than the S&P 500?
  • Is the highest performer from above > T-Bill rate?

That’s it!  That’s all that you have to do.

Simple, right?  Must do not too well…

Au contraire!

In a 40-year back test of this strategy from 1974 – 2013, the average return for the S&P 500 was 12.34% and the average return for GEM was 17.43%.  5% might not sound like a ton but after 40 years you would have about 4X the amount of money from investing with GEM as you would by simply investing in the S&P 500.

Now, I personally think that all of the Investing for Beginner’s readers are above the average investors so we can all beat the S&P 500 but beating by 5% for 40 years is a substantial accomplishment. 

And honestly, it’s one that has made me so excited that I have started to implement GEM in my portfolio.

The years where the market goes up are great but the major key is that when the stock market is down, GEM is barely down at all.  Like, not even close!

As you can see, the worst years for GEM aren’t even in the top 5 worst years for the ACWI (stock market index), meaning that the lows are much higher for GEM. 

This can be hard for an investor but it’s why you need to stay patient – you’re going to make your money in the down years rather than in the good ones.

So, if you’re going to take part in GEM, you have to make sure that you’re not going to sell when GEM doesn’t crush it in the good years (although the data says it still outperforms the market), you really need to wait for the bad years.

Personally, of the books that I have read with tangible strategies, this is potentially my favorite one!  I loved the math and data behind it and at the end of the data, it’s really not that hard of a strategy to actually implement.

If you’re reading this and feel overwhelmed, I think that a different way to play the momentum game could be to invest in MTUM, a momentum ETF.  I mean, all that it has done since inception is crush the S&P 500!