Momentum investing

Momentum investing is a system of buying stocks or other securities that have had high returns over the past three to twelve months, and selling those that have had poor returns over the same period.Wikipedia, Momentum investing It assumes that the price trend will continue.Investopedia, Momentum Investing, viewed March 2, 2018. Arnott R et al. (2017) Can Momentum Investing Be Saved?, Research Affiliates, Alice in Factorland series, viewed March 3, 2018. 
There are two main flavors of momentum investing. The first flavor can be seen as being part of technical analysis: traders use momentum indicators to interpret buy or sell signals. 
The second flavor is an investing strategy that attempts to exploit the momentum factor, or momentum anomaly, discovered by academic research. For example, Jegadeesh and Titman (1993)Jegadeesh N, Titman S (1993) Returns to buying winners and selling losers: Implications for stock market efficiency, Journal of Finance v. 48, p. 65–91 construct "relative strength" portfolios where the stocks that have performed the best (the bottom decile stocks or 'winners') over the previous 3-12 months are purchased, and those that performed the worse (the top decile stocks or 'loosers') are sold (by short selling them). These positions are then held for 3-12 months. The authors found that this strategy produced "significant abnormal returns over the 1965 to 1989 period".
This article is concerned with the second flavor of momentum investing, as implemented for example in some ETFs available in Canada and the US.
==Background==
Carhart (1997)Carhart MM (1997) On persistence in mutual fund performance, Journal of Finance, v. 52, p. 57-82, doi:0.1111/j.1540-6261.1997.tb03808.x., building on the Fama-French three factor model, added a forth factor, the one-year momentum anomaly of Jegadeesh and Titman (1993), to explain the cross-section in returns of equity mutual funds in the US from 1962 to 1993. This four factor model is now known as the Fama-French-Carhart model.Cazalet Z, Roncalli T (2014) Facts and Fantasies About Factor Investing. Available on SSRN.
There are two groups of explanations for the momentum anomaly/factor.Moskowitz TJ (2010) Explanations for the Momentum Premium, AQR White PaperAsness C, Frazzini A, Israel R, Moskowitz TJ (2014) Fact, Fiction and Momentum Investing, Journal of Portfolio Management, 40th anniversary issue. The first group of explanations proposes that extra returns are accounted for by extra risk. The second group consist of behavioral explanations such as "investor underreaction and delayed overreaction to news".
In The 52-Week High and Momentum Investing,George TJ, Hwang C-Y (2004), The 52-Week High and Momentum Investing, THE JOURNAL OF FINANCE • VOL. LIX, NO. 5 Thomas J. George and Chuan-Yang Hwang state that:
 
There is substantial evidence that stock prices do not follow random walks and that returns are predictable. Jegadeesh and Titman (1993) show that stock returns exhibit momentum behavior at intermediate horizons. A self-financing strategy that buys the top 10% and sells the bottom 10% of stocks ranked by returns during the past 6 months, and holds the positions for 6 months, produces profits of 1% per month. Moskowitz and Grinblatt (1999)Moskowitz TJ, Grinblatt M (1999) Do Industries Explain Momentum?, Journal of Finance, vol. LIV, p. 1249-1290. argue that momentum in individual stock returns is driven by momentum in industry returns.
DeBondt and Thaler (1985), Lee and Swaminathan (2000), and Jegadeesh and Titman (2001) document long-term reversals in stock returns. Stocks that perform poorly in the past perform better over the next 3 to 5 years than stocks that perform well in the past.
==Issues==
Many momentum strategies involve short selling. Note that short selling, if employed, "exposes investors to unlimited downside risk by short selling uncovered positions in their portfolios".Foltice B, Langer T (2015) Profitable momentum trading strategies for individual investors. Financial Markets and Portfolio Management, 29(2), 85-113, PDF available on SSRN.
Most momentum strategies have high turnover, high trading costs, and in taxable accounts may result in the investor paying more taxes.Kira Vermond, 'Momentum' investors are watching average Joes – a.k.a. you, The Globe and Mail, updated March 25, 2017, viewed March 3, 2018.
Larry Swedroe notes that research on momentum is conclusive, but that the "publication of academic research can impact the performance of investment factors shown to have premiums".Swedroe L (2016) Why Momentum Is Struggling. ETF.com
Rick Ferri writes that "Momentum can add value through better trading to an existing portfolio that is following some other strategy. However, trying to capture this factor as a stand alone premium is extremely difficult due to costs".Bogleheads forum, Rick Ferri post on Cliff Asness -- Momentum & Value, December 17, 2009, viewed March 4, 2018
==See also==
* Buy and hold
* Indexing
== References ==
==External links==
* AQR Capital Management, Momentum Bibliography
* Gary Antonacci, Factor Zoo or Unicorn Ranch?
Category:Glossary
Category:Investment styles
Category:Equities
Category:Investment management