Monday, February 7, 2011

Momentum investing

There's an interesting web page entitled "Is momentum  investing a viable strategy for individual investors?". Short answer: no. The article concluded that pros did quite well using momentum techniques, but that PIs (Private Investors) did not.

This is despite evidence that suggests that momentum investing works, with caveats. Companies with about 3-year relative strength tend to revert to the mean. Companies with 6-12 months relative strength seem like good bets, with momentum being maintained for another year or so.

I can't cite the source, but I was reading that relative strength held up well against growth investing; and it was suggested that growth investors could probably do better by switching to momentum. Momentum investing was found to be negatively correlated with value investing; so value investors could improve their returns by incorporating a momentum component. 6 months relative strength seems like a suitable figure if you're going to hold the shares for a year. Intuitively, this could make sense, as, from a more mechanical viewpoint, it helps you avoid value traps.


Dave said...

Mark, great blog. Can you drop me a quick line? Wanted to discuss something. Cheers, Dave

Mark Carter said...

David, Blogger wont let me see your profile, so I don't know your email address, or have any other means of contacting you. Please contact my email address which is
yahoo dot co dot uk