Weekend Reads for Investors: Momentum Matters

The momentum effect in investing refers to the tendency of stocks and other financial assets to show persistence in their relative performance. Narasimhan Jegadeesh and Sheridan Titman documented the anomaly in “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency,” widely considered to be the seminal study on momentum investing. Despite convincing data, momentum hasn’t been widely embraced as an investment strategy. Research Affiliates, for one, has likened it to a “game of hot potato,” and considers it nothing more than a short-term trading strategy.

In contrast, AQR Capital Management has had considerable success combining momentum and value factors into its quantitative investment process, citing the negative correlation between the two strategies. Cliff Asness, Andrea Frazzini, and Ronen Israel, colleagues at AQR, along with Tobias J. Moskowitz of the University of Chicago Booth School of Business, offer a spirited defense of momentum investing in the recently published “Fact, Fiction, and Momentum Investing.” Asness et al set out to dispel what they see as 10 common myths about momentum, including that it lacks a unifying theory, is inappropriate for taxable investors, and only works on the short side. It’s a worthwhile and compelling read. Below are some other worthwhile stories and videos from recent weeks.

Strategic Thinking

• More from Cliff Asness on the art of knowing nothing brilliantly. (CFA Institute Magazine)
• “Can Investors Profit using Academic Research?” (Advisor Perspectives)
• John Mauldin tackles stock market valuations. (Forbes)
• “Should We Forget Shiller CAPE Ratios and Focus on E/P Instead?” (Nerd’s Eye View)
• GMO’s Arjun Divecha on the most important variable in emerging markets investing. (CFA Institute)
• Richard Bernstein on protecting the downside. (Richard Bernstein Advisors, PDF)

Market Trends

• The growing popularity of unconstrained investing. (Institutional Investor)
• “Crowdsourcing Investment Insights: How and Why It Works” (CFA Institute)
• Algorithms versus intuition. (Turnkey Analyst)
• Toward a better understanding of the principal-agent problem in finance. (CFA Institute Research Foundation, PDF)

Getting Technical

• “Taboo Talk: Technical Analysis” (Morningstar)
• “The Predictive Power of Utility Stocks” (Enterprising Investor)

Heavyweight Battles

• “The Great Smartphone War” (Vanity Fair)
• “World Cup Shootout: Can Nike Beat Adidas at Soccer?” (Bloomberg Businessweek)

High Profiles

• “What Timothy Geithner Really Thinks” (The New York Times Magazine)
• Warren Buffett, Bill Gates, and Charlie Munger talk taxes, Bitcoin and technology. (Fox Business, video)
• The latest issue of Graham & Doddsville newsletter includes insightful interviews with value investor Arnold Van Den Berg and activist investor Eric Rosenfeld. (Columbia Business School, PDF)

Twitter

• “A Eulogy for Twitter” (The Atlantic)
• Competing views on the outlook for Twitter. (The Wall Street Journal)

Yahoo and Alibaba

• Aswath Damodaran calls Yahoo! a puzzle, a mystery, and an enigma. (Musings on Markets)
• “Alibaba’s IPO: What’s behind the ‘Thousand-pound Gorilla’?” (Knowledge@Wharton)

Philanthropy

• “The $13 Billion Mystery Angels” (Bloomberg Businessweek)
• “The Importance of Criticizing Philanthropy” (The Atlantic)

In Memoriam

• Remembering economist Gary S. Becker (University of Chicago Booth School of Business), the man who put the human into economics. (Financial Times)

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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