Source:http://anishteli.blogspot.in/2014/05/dont-fight-trend.html
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2435323
Holy grail of value investing seems like research and investing against the trend; There are variants in terms of modifying the style by reducing or amplifying risk (although definition of risk itself could vary from individual to individual). Risk 'probably' could be best explained by permanent loss of capital. Its delayed gratification and hence is against our nature - easy to preach impossible to practice
Momentum investing on the other hand relies heavily on trend following; its a bit like surfing or fashion - you enjoy the ride but you don't get out at the right moment, you are screwed! Its an addiction, easy to practice but very tough to manage risk (eg. Stop loss etc)
The paper demonstrates that momentum works over well over long periods of time and beats value significantly. Additionally, it also reduces risk (defined as volatility in stock prices)
HML: is long high P/B - why would this constitute Value? if any you combine low P/B and strong research that 'could' constitute Value
UMD: is momentum looking at past returns to extrapolate into the future - Newton's law at work
In any event, HML generates about 4.7% return over the long run less than market return; clearly, Value does not mean buy the cheapest s**t in the market. There are multiple cases of value doing well either from 60s crop of investors or 90s crop of investors. The value of value really lies in the research part and behavioral part.
Nevertheless, key things that could be picked up from the paper:
- Can one somehow combine Value and Momentum investing?
- Can risk be managed effectively by having stop losses?
- Does momentum or anti momentum work individually precisely because there is no section of the investors who believe in combining both?
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2435323
Holy grail of value investing seems like research and investing against the trend; There are variants in terms of modifying the style by reducing or amplifying risk (although definition of risk itself could vary from individual to individual). Risk 'probably' could be best explained by permanent loss of capital. Its delayed gratification and hence is against our nature - easy to preach impossible to practice
Momentum investing on the other hand relies heavily on trend following; its a bit like surfing or fashion - you enjoy the ride but you don't get out at the right moment, you are screwed! Its an addiction, easy to practice but very tough to manage risk (eg. Stop loss etc)
The paper demonstrates that momentum works over well over long periods of time and beats value significantly. Additionally, it also reduces risk (defined as volatility in stock prices)
HML: is long high P/B - why would this constitute Value? if any you combine low P/B and strong research that 'could' constitute Value
UMD: is momentum looking at past returns to extrapolate into the future - Newton's law at work
In any event, HML generates about 4.7% return over the long run less than market return; clearly, Value does not mean buy the cheapest s**t in the market. There are multiple cases of value doing well either from 60s crop of investors or 90s crop of investors. The value of value really lies in the research part and behavioral part.
Nevertheless, key things that could be picked up from the paper:
- Can one somehow combine Value and Momentum investing?
- Can risk be managed effectively by having stop losses?
- Does momentum or anti momentum work individually precisely because there is no section of the investors who believe in combining both?
What is HML and UMD?
ReplyDeleteHML - High Minus Low - effectively buying stocks with High P/B and shorting stocks with Low P/B
DeleteUMD - Up Minus Down - Buying stocks that went up in the last 1 year and Shorting stocks that went down in the last 1 year.
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