[Editor’s Note: This review is a guest post written by a regular WCI reader, Robert Kanterman, MD, a practicing interventional radiologist. This recently published book on momentum investing has been the subject of much discussion in the comments section of several posts as well as on internet forums. I had not read this book at the time the post was written and edited. We have no financial relationship. Bob also notes that he has no financial conflicts of interest, but would welcome some if anyone is interested.]
I am a 49 year old interventional radiologist in the St. Louis, MO area, and have been active in investing since I was a ninth grader, when I purchased Boeing stock with my Bar Mitzvah money. As a radiology resident, I was introduced to Morningstar and invested in Vanguard Wellesley, my first mutual fund purchase. By the mid-1990s, I became a community leader for the AOL “Sage Mutual Funds” site. I started indexing in the late 1990s and later had the opportunity to purchase DFA funds through an advisor that my practice contracted to oversee our retirement plan. I have always had an interest in the investing and personal finance space, and I credit the book, The Millionaire Next Door, published right after I finished training, for saving my financial life. (My wife may have another spin on that!)
I recently read (or devoured, is more accurate), Gary Antonacci’s Dual Momentum Investing. As a regular reader of the works of Bill Bernstein, Larry Swedroe, and the like, I approached the subject with a fair amount of skepticism. The word “momentum”, in the context of investing, takes me back to the go-go years of the late 90’s and painful losses. Global Crossing anyone?
The Author’s Story
The book begins with the author as a young employee of Smith Barney in the mid-1970s, first discovering the valuable attributes of indexing—low costs, diversification, and efficiency of the stock market. He promptly quit the firm, as he realized that he did not believe he could do well by his clients by trying to beat the market. By the 1990s, the author was questioning the Efficient Market Hypothesis, the foundational belief of indexing and Bogleheadism. [Although Bogle would argue the foundational belief is the Cost Matters Hypothesis-ed.] By this time, the “momentum anomaly” was just being discussed in the academic literature, and this sets the stage for the rest of the book.
Chapter 2 is entitled, “What Goes Up…Stays Up,” and discusses the historical underpinnings of momentum as a force of investing, “the tendency of investments to persist in their performance.” Momentum principles date back to the early 20th century and show up with increasing frequency in the academic finance literature, as well as in more mainstream resources like Value Line, Investors Business Daily, Dreyfus Mutual Funds, and even Fidelity’s first retail fund offerings in 1946, not to mention investing success stories documented in books spanning the 20th century. Commodity traders, early hedge fund managers, and even Nobel Laureates recognized the importance of momentum in predicting investment returns. In Chapter 3, the author discusses some of the contemporary concepts and controversies in Modern Portfolio Theory (MVO, CAPM, and the like), a deeper dive into some of the issues that have lead many of us to Bogleheadism and its variations.
My favorite chapter may be Chapter 4, which delves into behavioral economics and how many of the principles thereof explain why momentum exists and works. In short, it is that “investors behave unexpectedly and irrationally in systematic and predictable ways.” In greater length, Antonacci describes anchoring and underreaction, confirmation bias, herding and overreaction, conservatism, and overconfidence. My favorite is the one that afflicts me the most, the disposition effect, holding on to losers too long and selling the winners early, to lock in gains. These behavioral shortcomings are pervasive, among individual investors, advisors, and professional money managers, costing the end user, the investor, dearly in the long run.
The following chapters discusses various asset classes and strategies and why they result in the investor leaving money on the table. Antonacci says that bonds, “diworsification”, commodities, futures, hedge funds, private equity, active mutual funds, smart beta (our flavor du jour) and good old fashioned stock picking all have their shortcomings and limit the investor from reaching his/her return potential for various and sundry reasons. He also says that Factors like size and value may be overgrazed or artifacts of faulty investigation. So what’s left? Momentum.
Absolute and Relative Momentum
Absolute momentum is the process of researching the returns for an asset class over a look back period and comparing it to the risk-free return (treasury bills). If it is positive, there is absolute momentum, otherwise known as trend following. Relative strength momentum compares one asset with another, while absolute momentum compares an asset with itself longitudinally. Peer reviewed papers on absolute momentum profits show that it works for dozens of assets and classes over time, consistently profitable back to 1903.
And finally we get to the strategy that is the basis of the book: dual momentum, combining the positive attributes of absolute and relative momentum. The Global Equities Momentum Strategy, which [using backtested data-ed] outperformed the the S&P 500 (or your index of choice) for the last 40 years with less than half of the maximum drawdown, is finally revealed. I feel like it took 100 years to get to this point in the story—it did. Briefly, the strategy is as follows: Every month, look back at the 1 year returns of the S&P 500 and the ACWI ex-US index. If either is higher than the 1 year return on T-bills, buy (or hold) the one that is higher of the two. If not, buy (or hold) the aggregate bond index. Your position will be 100% either SPY, VEU, or AGG.
There are variations that can be used to either juice returns or reduce drawdowns. Step-by-step instructions are provided. I hesitated to reveal the strategy because if you do not read the background information, there is no way that you would or should consider employing it, and it will be of little value. The strategy is so easy to implement that it can be confidently applied to other asset classes and easily tailored to one’s native or ingrained investing styles and tilts.
The book is extremely well-written, funny at times, incorporating anecdotes and pithy quotes to make points. I can tell by reading the book that the author would be enjoyable company at a dinner party or on a morning run. I have heard him interviewed in podcasts, and he speaks well, too. Even if you have no inkling to deploy the strategy, if you manage your own assets, as a reader you will get an overview of other strategies that you likely employ, their historical basis and academic foundations, their strengths and weaknesses and the behavioral tendencies that tend to thwart the individual investor, again and again. It is a quick, if not inexpensive, weekend read for the intermediate level (and above) self-directed investor, and it has certainly influenced my personal strategy going forward.
Have you read the book? What did you think? Do you incorporate momentum into your investing strategy? If so, how? Do you think it is worth including on the WCI recommended reading list? Comment below!