Momentum Investing’s Bad Luck May Be About to Turn
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There’s a one-in-seven chance that stock market momentum will fail over any given 10-year period. That’s important to bear in mind since momentum is coming off one of those 10-year periods. Its failure has led to no end of soul-searching among advisers and researchers alike, wondering whether the venerable momentum effect may have stopped working permanently.
Their fretting was likely little more than wasted energy. Even if momentum is just as effective a strategy in the future as the past, the volatility of its returns is such that there is a not-insignificant chance that it will still lose money over any given 10-year period.
That is the conclusion I reached upon analyzing momentum’s performance since 1927 in the U.S. stock market, courtesy of the database maintained by University of Chicago finance professor (and Nobel laureate) Eugene Fama and Dartmouth finance professor Ken French. To measure the likelihood of momentum losing money over a given decade, I conducted 100,000 simulations in each of which I picked 120 months at random from the more than 1,100 actual months between 1927 and 2018.
Read: Why Two Stock ‘Factors’ May Be Better Than One
These simulations produced a 10-year loss 13.1% of the time. To be sure, this finding doesn’t rule out the possibility that the momentum effect has become less pronounced in recent years, or even that it may have disappeared altogether. But the simplest and most straightforward assumption we should make when some long-standing pattern stops working is that it’s caused by nothing more than random fluctuations of the data — bad luck, in other words.
In reaching this conclusion, I closely followed the research design laid out by Fama and French in an article they wrote for the third-quarter of 2018’s issue of the Financial Analysts Journal. In this article, they reported on similar simulations for the small-cap effect (small-cap stocks outperforming large-caps) and the value effect (value beats growth). The frequency of negative 10-year returns that they found was similar to what I found for momentum.
The takeaway here is that it’s difficult for any of us to accept that we may lose money over a decade for no other reason than mere bad luck. Our psyches demand an explanation, since it requires too much cognitive dissonance to accept that so much pain could be caused by randomness. So we are led inexorably to come up with after-the-fact explanations for what happened.
We need to resist that impulse. The first possibility we should always entertain is that failure was caused by bad luck. Only when that possibility is ruled out should we begin to explore other possible explanations.
Consider the track record of a momentum-based advisory service that I monitor, NoLoad Fund X, whose editor is Janet Brown. The service constructs several different model portfolios of mutual funds based on their momentum, and over the long term these portfolios have performed well on average. But over the last decade they have lagged the market. (See accompanying chart.)
Since mid-1980, according to the Hulbert Financial Digest, the service’s average model portfolio has beaten the Wilshire 5000 index by an annualized margin of 11.8% to 11.0%. Over the past decade, in contrast, the service’s average model portfolio has lagged by a margin of 9.9% to 13.0%. (To put these results another way, the newsletter over the 28 years prior to the last decade beat a buy-and-hold by 2.1 annualized percentage points.)
Lagging the market by an annualized 3.1 percentage points over a decade is well within the range of what emerged from my simulations. So the simplest and most straightforward explanation is that the newsletter is coming off a rare, but not unprecedented, period of bad luck.
Accordingly, after such a poor stretch, NoLoad Fund X can be expected to soon start outperforming the broad market. This may have already begun, in fact. In 2018, according to the Hulbert Financial Digest, the newsletter beat the Wilshire 5000 index by 1.9 percentage points.
For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com.
This article originally appeared on MarketWatch.
I always thought people who flew first class were suckers, until I realized they knew something about spending money it took me years to figure out
Growing up in Sacramento, I remember a lot of guys who loved buying old cars and spending tens of thousands to repair them — huh??
Why would anyone spend their hard-earned money to create more work for themselves? I just didn't get it.
Along the same vein, I used to see people paying for first-class flights and think that they were suckers. After all, "we're all going to the same place anyway."
Over time, I've come to change the way I think about how people spend money. I'll never buy an old car to repair, but I do fly first class … and now I understand why people do both: priorities.
The most successful people I've met are all very conscious and intentional about how they spend their money. That doesn't mean they don't spend. It means they choose how to spend and are unapologetic in allocating significant resources to make their lives more convenient, more efficient, more organized, and generally just better — in whatever area of life they need to maximize the most.
If I looked at your spending for five minutes, I could tell where your priorities lie because people go to where their time and money go. For example, health-conscious people spend time and money on being healthy. Fashionable people spend time and money researching the latest fashion trends and shopping.
The most fascinating thing is that many of us are misaligned in our priorities and where we allocate our money.
Read more: I'm convinced real estate is one of the most overrated investments out there, but I plan to buy a house anyway because of a strategy I implemented years ago
For instance, some people claim that they care about fitness, but if you were to look at their spending for 10 minutes, they may prioritize everything else but fitness. Then if you really looked at where they were spending their money, you could instantly know what is their priority.
I spent years talking to people about their spending habits, and I boiled them down to something I've termed "money dials"— called such because you can turn them up or down, just like a dial.
I love this because once you understand your own money dial, and you accept it, you can zoom in on what you love and makes your own life "better" by turning the dial all the way up. Here are some examples:
Finding your money dial — your true priority in your life currently — can be intimidating and at the same time liberating.
Do you know what you naturally gravitate toward spending on? Most of us don't. We've never thought about it. But as Tony Robbins says, "Success leaves clues." And spending leaves clues, too.
These money dials are an easy way to diagnose what you claim is important versus what is actually important. It will change the way you think about spending money.
It allows you to comfortably say, "Hey, this is important to me — and that's not." I encourage you to check out my post on money dials to learn about what your money dial might be.
Ramit Sethi is the author of the New York Times bestseller "I Will Teach You To Be Rich" and writes for more than 1 million readers on his websites, I Will Teach You To Be Rich and GrowthLab. His work on personal finance and entrepreneurship have been featured in The New York Times, The Wall Street Journal, and Business Insider.
'Fox & Friends' Warns 'Legitimate Socialist' Bernie Sanders May Turn US into Venezuela
Fox News ridiculed Vermont Sen. Bernie Sanders' presidential campaign announcement Tuesday morning, warning viewers of the danger that comes with having a "legitimate socialist" entering the 2020 race.
The Fox & Friends hosts mocked the Democratic Party for not being "outraged" that Sanders, an Independent who caucuses with the Democrats, refuses to officially join the party. Host Ainsley Earhardt remarked "more and more people are supporting the socialist agenda," particularly millennials, and said the eight other official 2020 Democratic candidates have embraced the issues Sanders ran on in 2016 against Hillary Clinton. The Tuesday morning segment dismissed the concepts of free college tuition and healthcare for all Americans as "socialist" while also cautioning viewers about following Venezuela "into the toilet."
The segment blamed groups like millennials and Latin American governments for allowing socialist ideas to creep into mainstream U.S. politics. The Fox hosts repeatedly mislabeled Sanders a "socialist" despite him being a self-described "democratic socialist." Sanders frequently notes the U.S. already has so-called "socialist" programs in housing, medicine and health care.
Fox & Friends then interviewed several diner patrons in Florida just one day after President Donald Trump declared to a Miami crowd, "America will never be a socialist country."
One diner named Luis urged Sanders to "visit any Latin American country that has socialism and see that they went bankrupt...their economies are crumbling." Another diner and self-described teacher claimed millennials are embracing socialist policies "because they have been indoctrinated in our schools by leftist professors. It is time that we teach these youngsters that socialism is not what it's cracked up to be, there is no equality in socialism except misery."
Host Brian Kilmeade then rattled off all of the so-called "socialist" policies that a Sanders voter supports: "If you vote for Bernie this is what you’re getting. Free tuition, $15 minimum wage, health care as a right for all people. Radical ideas are now mainstream ideas because of your support. Everyone gets everything for free because these horrible rich people have had it too good for too long. He’s a legitimate socialist, there’s those that dabble, but he’s been there.”
Kilmeade and co-host Steve Doocy then delved back into the 2016 DNC superdelegate debate, which many Sanders supporters say robbed him of a potential primary victory over Clinton.
“Medicare for all. The single payer system. Free college. His Anti-Israel policy that was basically his foreign policy,” Kilmeade said. "It won him New Hampshire and it almost took Iowa [in 2016.] It scared the heck out of Hillary Clinton and then all of the sudden Debbie Wasserman Schultz was working behind the scenes cut his knees out along with the super delegates who were acquired before Bernie Sanders was actually in.”
“If I am a Democrat, if I am running the Democratic committee, I’d be outraged right now. He won’t even join my party, yet he wants my nomination. I say hit the road. In or out?” Kilmeade added.
Sanders has repeatedly stated that Independent candidates like himself are forced to run under the binary apparatus of either the Democratic or Republican parties in order to have a legitimate shot at winning the presidency.
“The thing about Bernie now that he’s declared he is going to run for president on the Democratic Party,” co-host Steve Doocy said. “He has been a national leader ever since he ran against Hillary Clinton in 2016 and did really well. But even though he is one of the national leaders in the Democratic Party, he refuses to join the Democratic Party. He described himself as a democratic socialist, when you look at his agenda, it is very clear, in addition to universal healthcare, healthcare for all, many other things that made Bernie in 2016 stand out.”
Earhardt chimed in with standard Fox News hyperbole to caution viewers about Sanders' "very liberal agenda...more and more people are supporting the socialist agenda. You make a lot of money? Give it away." She then added a comment about the 77-year-old's appearance, "He actually looks good."
The hosts then floated a theory about the announcement's timing just hours after Trump's Monday condemnation of socialism in countries such as Venezuela.
Fox News ridiculed Vermont Sen. Bernie Sanders' presidential campaign announcement Tuesday morning, warning viewers of the danger that comes with having a "legitimate socialist" entering the 2020 race. Screenshot: Fox & Friends YouTube
“What about the timing?” Kilmeade pondered. “The timing of a socialist declaring for president one day after the president of the United States condemned socialism in Miami and we look at Venezuela as a case in point of what could happen to America with all our natural resources, with all our history like Venezuela, much richer than Venezuela.”
“And all their oil resources, they have gone into the toilet as a country," Kilmeade continued. "They can’t even stock their shelves with food that would be too expensive to buy anyway because of inflation."
Asked by CBS This Morning host John Dickerson about another independent candidate for president, Howard Schultz, Sanders shot back, "Why are you quoting Howard Schultz? He's a billionaire! We have a corrupt system where anybody who is a billionaire and can throw ads around on television suddenly becomes very, very credible."
On Monday, Doocy asked one of Sanders' Democratic rivals in the upcoming primary, Kamala Harris, if she needed to adopt Sanders' democratic socialism platform to win in 2020.
"Well, the people of New Hampshire will tell me what’s required to compete in New Hampshire, but I will tell you I am not a Democratic socialist,” Harris responded. “I believe that what voters do want is, they want to know that whoever is going to lead understands that in America today, not everyone has equal opportunity to, and access to, a path to success, and that has been building up over the decades, and we have got to correct our course.
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