Millennial Money by Patrick O'Shaughnessy

Author:Patrick O'Shaughnessy
Language: eng
Format: mobi, epub
Publisher: St. Martin's Press
Published: 2014-09-03T23:00:00+00:00

Rule #5—Momentum

Value will always matter but sometimes value investments take a long time to turn in the investor’s favor and—let’s face it—we millennials don’t like waiting too long for anything. Luckily, we can use momentum to help us determine when to buy cheap stocks. Focusing on value is the best way to identify stocks that are out of favor and where perception may be far worse than reality. The problem with some value stocks is that they are cheap for good reason, and the market won’t start loving them again anytime soon. Momentum helps avoid this problem because, as Willie Nelson said, “The early bird gets the worm, but the second mouse gets the cheese.” I don’t know about you, but I’ll take the cheese any day. If we can identify cheap stocks that the market is just beginning to notice, we can make our strategy even more effective, and avoid having to wait years for the market to recognize the real value of the cheap stocks in our portfolio.

As the Sector Winners strategy from chapter 5 revealed, high-momentum stocks have delivered outstanding returns to investors for decades. Simply buying stocks that have gone up the most in the past six months has been an easy—but admittedly very risky—way of beating the market. The high-momentum strategy has produced a return of 15.2 percent annually and easily trounced the market’s 10 percent return in the same period, but momentum stocks are 50 percent more volatile than the market, so to be a pure momentum investor you’d have to have a very high tolerance for periods of weak performance.18 There have been numerous occasions when the high-momentum portfolio loses relative to the market by more than 15 percent in a one-year period, and one occasion when it lagged the market by 35 percent! Can you imagine sticking with a strategy following a year when you trailed the market by that much? Me neither. Figure 6.2 shows that high-momentum stocks are much more volatile than the overall market.

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