Value Shmalue – Welcome to Dual Momentum Investing! (Ch. Review)

Lately I’ve been taking a deep dive momentum stocks and I have going down a major momentum stock rabbit hole since then, so I figured, why not do my next book review on momentum stocks?  Well, sure enough, if you Google “best momentum investing books” then ‘Dual Momentum Investing’ comes up, so let’s go with that book!

Not going to lie, I am a value investor.  I am continuously challenging myself to think differently than I have in the past, and I know that many of you are value investors like Andrew and Dave are as well, so I’m going to be coming at this entire review from a skeptical view and really trying to play devil’s advocate with things.

I think that playing devil’s advocate is a great way to learn in many different areas of life as long as you do it politely and don’t ruffle any feathers, but I’m just writing a blog so who cares!

Sure, the title might be a bit more click baity like some of my other articles about checking your portfolio daily and how if you’re dollar cost averaging then you need to stop right now, but oh well – that’s the point!

So, I’ve digressed enough – let’s get going!

As I mentioned, I’m going to review the book ‘Dual Momentum Investing’ by Gary Antonacci, and the book isn’t cheap by any means as it’s sitting on Amazon with a price tag of $44 and change , so we shall see if it’s worth it!  And if not, that’s why you get to read all of my reviews ?

Does Buy and Hold Indexing Work?

The book starts off by Antonacci talking about the World’s First Index Fund and why it worked.  No, it wasn’t Jack Vogle like you might think.  It was actually a woman named Dee.  Dee was married to Bob, one of the best stock pickers in the business.  Dee picked her companies by doing the following:

  • She was very patriotic so she bought every company that had ‘U.S.’ or ‘American’ in the name, such as U.S. Steel, U.S. Silica, American Airlines, and American Electric Power to name a few
  • Then she literally just let these companies ride. 

And guess what?  It worked!

It worked because she had very minimal transaction costs as she was just buying and holding.  Thankfully, we don’t have to deal with transaction costs much anymore as so many brokerages offer free trades but this was absolutely a major key back in the day. 

Dee also didn’t have to pay management fees which saved her over 1%/year.

And then, her portfolio was diversified because the companies really had nothing in common with the exception of having a patriotic name.

The things that really stood out to Antonacci were to keep costs as low as possible, diversify broadly, and that replicating the market might not be the worst thing in the world.

Introducing the Efficient Market Hypothesis

At this point in time, Efficient Market Hypothesis (EMH) was really the basis of all investing.

Essentially EMH is just saying that markets are rational and that the prices in the market are always going to eventually revert back to the mean and show a fair value. 

Personally, I don’t think this is very accurate and I know that Andrew and Dave don’t find this to be true either

Testing EMH is what really brought Momentum Investing into focus and has allowed it to start to flourish because people were challenging the status quo and playing devil’s advocate. 

I mean, even Warren Buffett came out and said

“Amazingly, EMH was embraced not only by academics but also by many investment professionals and corporate managers as well.  Observing correctly that the market was frequently efficient, the went on to conclude that the market was always efficient.  The difference between these propositions is night and day.”

I mean, if Buffett is coming out and saying something like that, then us as value investors likely agree too, correct?  I know that when Buffett is saying something that’s contradictory to the norm, it’s something that I absolutely pay a lot of attention to.

Robert Shiller, as we have talked about before and is the creator of his own P/E Method, came out and said:

“This argument for efficient market hypothesis represents one of the most remarkable errors in the history of economic thought.  It is remarkable in the immediacy of its logical effort and in the sweep and implications of its conclusions.”

Essentially, it really boils down to “people acting in emotional and irrational ways could cause prices to depart systemically from their fundamental values in predictable ways,” according to Antonacci. 

By being able to locate and identify these predictable trends, they could find stocks that are poised for continued periods outperformance and then continue to ride the wave all the way up, and that’s really the concept of Momentum Investing in a nutshell.

Momentum Investing might seem like a new thing but it’s really not, and in fact, it has been around since 1838! 

David Ricardo noted that we should “cut your losses; let your profits run on”.

Then in the 1950’s, George Chestnutt said “many more times than not, it is better to buy the leaders and leave the laggards along.  In the market, as in many other phases of life, the strong get stronger, and the weak get weaker.”

This quote really hit me hard because it is just so true.

Richard Driehaus was an extremely successful investor in the 1970’s and the 1980’s and he said “Perhaps the best-known investment paradigm is buy low, sell high.  I believe that more money can be made by buying high and selling at even higher prices.”

Not going to lie – as a value investor, this is hard to hear and harder to believe.  Value investing is all about finding that diamond in the rough; that company that’s selling at a price lower than its intrinsic value.  You’re looking for VALUE.

Value is when something is naturally discounted below where it should be, meaning that there has likely been either a decrease in price or a major increase in the value of the company without it being realized in the share price. 

Momentum is the exact opposite of this.

Historical Studies on Momentum Investing

Robert A. Levy decided in 1967 that he was going to test out this theory of momentum.  He was also the one that coined the term “relative strength” which is an extremely common indicator for the momentum of a stock, known as the RSI. 

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.

As I mentioned, I am coming at this book as someone that is very curious but also a skeptic.  Immediately, I am telling myself that I think this study is flawed.  Looking at companies that are bad performers on price return doesn’t mean they’re best VALUE.  It might be a company that is in a dying industry or maybe they’ve been tiptoeing on bankruptcy for years.

I put 0% credibility into this study, but that’s just me.  Like I said, I’m writing this to see if I can be proven wrong, so be ready for more of this very candid, value-biased feedback of mine.

Another study was done with data that ranged from 1965-1989 and this time, we saw fairly similar, but even stronger results than the study that Levy completed.

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.

Honestly, this data somewhat seems like more of the same to me, but I like that they’re making it a bigger basis by simply using “winning” and “losing” stocks.  Doing this deepens the pool and takes out some of the importance of outliers.

Not to mention, 1%/month is 12%/year, not taking into effect the value of compounding.  That is nearly double the outperformance, and the time period is 25 years instead of 5. 

So, overall, I really trust the validity of this study much, much more, but am still skeptical!

The study was then expanded even more and they did the same from 1990 – 1998 and found the same exact results – winners will outperform by 1%/month or so over the losers.

Testing Momentum Investing

Antonacci then goes on to talk about how many different studies have been done on Momentum investing, including a lot that will be focused on in the book, and there’s really four main areas of focus:

  • Determining the momentum effect across different assets
  • The statistical properties of momentum returns
  • Theoretical explanations of the momentum effect
  • Enhancements to momentum-based strategies

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.

.4% might not sound like a ton of money but it absolutely is.  That measly .4%/month is worth $47/year for every $1K that you have invested!

It really doesn’t take much for you to experience monstrous returns in the market and the value of compound interest will just continue to build and build, further extrapolating your gains.

If you’re already somewhat hooked on the idea of momentum investing, I would first urge you to slow down and try it to learn a little bit more, but if you absolutely can’t, then maybe an ETF is the way to go.

Dorsey, Wright & Associates was the first to have a momentum ETF and now BlackRock iShares has one as well.  Since inception, the ETF ‘MTUM’ has destroyed the returns of the S&P 500. Seeing that along was enough to get me really close to investing in the ETF but I chose to hold off.

Instead, I told myself that I shouldn’t just blindly jump in and that I really needed to do more research and understand the philosophies and principles of momentum investing.  It’s dangerous to invest in a company that you know nothing about, but it might be even more dangerous to jump into something that really goes against your entire philosophy just because some historical data shows you that things look good.

GE had a nice past at one time.  So did Ford.  So did Coal companies.  So did Lehman Brothers.  So did Enron.  Yes, I know that I got a bit more extreme as my list went on and on, but the past is nothing but the past.  Sure, it is a good indicator of things to come in the future, but you also need to make sure that you are very comfortable with the company’s outlook, or in this case, the entire philosophy of momentum investing.

At this point, I am absolutely not sold on momentum investing and it seems a bit more like trading than investing.  Honestly, trading is fun, and I do some in my short-term portfolio, but it’s super risky and honestly just somewhat dumb.  I do it because I’m very young and I want to take the risk early in my life to try to get some big returns because the stock market is just sooo volatile, but it’s really on a very, very small portion of my portfolio.

The point that I am trying to make is that so far, I’ve read some very promising things in ‘Dual Momentum Investing’ and I think that there’s a chance that I might get sold on the philosophy after reading further into the book. 

I promise that I’ll make it a point to come back after the fact and link to some of the other summaries that I have written so you can just keep going onto the next chapter, or better yet, why not just go buy the book for yourself?

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