A momentum investing strategy is the rather insane proposition that you can buy a portfolio of what’s been going up for the last 6 to 12 months, sell a portfolio of what’s been going down for the last 6 to 12 months, and you beat the market. Unfortunately for sanity, that seems to be true.
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One thing I should really be careful about. I throw out the word “works.” I say “This strategy works.” I mean “in the cowardly statistician fashion.” It works two out of three years for a hundred years. We get small p-values, large t-statistics, if anyone likes those kind of numbers out there. We’re reasonably sure the average return is positive. It has horrible streaks within that of not working.
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...what’s the actual vision of human nature? What’s the underlying human imperfection that allows it to be the case, that trading on momentum across say a 3 to 12 month time window, sorry, investing on momentum, will work? What’s with us as people? What’s the core human imperfection?
Recommended: a conversation between Tyler Cowen and Cliff Asness about financial markets. Especially recommended for people who insist that markets are fully efficient.
Samples:
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Maybe because everybody thinks that you try to buy a stock when it’s low and sell if it is high?