Quantitative Momentum: A Guide to Momentum-Based Stock Selection

/Quantitative Momentum: A Guide to Momentum-Based Stock Selection

Quantitative Momentum: A Guide to Momentum-Based Stock Selection

The long wait is over.

Our newest book–Quantitative Momentum–is finally here.

After 2 years of research review, results replication, reverse engineering, internal idea generation, writing, editing, and final publication, we have a final product.

We think the book will help fulfill our firm mission to empower investors through education.

Others agreed: To include Cliff Asness of AQR and Narasimhan Jegadeesh of “Jegadeesh and Titman 1993.”

Cliff Asness, Managing and Founding Principal of AQR Capital Management

Systematic momentum investing, as opposed to its complementary cousin value, has not gotten the investor attention it deserves. Wes and Jack fix this problem. Anyone interested in systematic investing should read this book and add more tools to their repertoire.

Narasimhan Jegadeesh, Dean’s Distinguished Chair in Finance at Goizueta Business School

Quantitative Momentum is the story of momentum-based stock selection algorithms. Wes and Jack lucidly explain how and why these systems work.

The mission of Quantitative Momentum is as follows: identify an efficient and effective way to capture the long-term momentum premium.

  • Note1: the mission parallels that of Quantitative Value, but in the context of capturing the so-called momentum anomaly.
  • Note2: the long-term momentum premium may not pay in the future–even with a great process in place.

How to Purchase at a Heavy Discount to Face Value

Our firm mission is to empower investors through education. We are not in the book selling business, nor are we trying to make money selling books. We simply want to get our research in the hands of thoughtful long-term investors and investment professionals.

To keep costs low, we bought in bulk from Wiley and are reselling our inventory at cost via Amazon for $14.99 plus shipping.

qmom-cover

Quantitative Momentum is about using Momentum for Stock-Selection

We believe our book offers readers a current and in-depth overview of how to harness momentum in the context of stock-selection. This book is not about trend-following, market-timing, relative strength asset selection, absolute momentum, dual momentum, and so forth (we leave that to Meb Faber, Gary Antonacci, Adam Butler & crew, Mike Covel, and so on). This is a book about using momentum for stock selection (the closest book to our own, which we also recommend, is Stocks on the Move by Andreas Clenow).

Also, this is not a book for investors with little motivation to understand relatively complex topics. You don’t need a CFA or a PhD, but you do need a desire to learn. In the end, while you can draw your own conclusions about how and whether to include momentum as part of your own investing style, we’re confident you’ll be a more informed investor. But don’t take our word for it. We pre-circulated the book among a group of investors and thought-leaders we really respect and admire.

Here is what they had to say about Quantitative Momentum:

Systematic momentum investing, as opposed to its complementary cousin value, has not gotten the investor attention it deserves. Wes and Jack fix this problem. Anyone interested in systematic investing should read this book and add more tools to their repertoire.

Cliff Asness, Managing and Founding Principal of AQR Capital Management

In our own research, we have found that the predictive price return momentum pattern persists backward in time for hundreds of years in equities and for extended out of sample settings for other classes of assets. Anyone who is using, studying or incorporating momentum will find a wealth of information in the pages of Quantitative Momentum.

Chris Geczy, Founder and CEO of Forefront Analytics

If you want to understand, explore, and ultimately exploit momentum investing, then there is no better (or faster) way to than to read Quantitative Momentum.

Pat O’Shaughnessy, Principal and Portfolio Manager of O’Shaughnessy Asset Management

Wes and Jack do an admirable job explaining momentum principles and its behavioral basis. If you are interested in using momentum as a stock selection tool, this is a must have book.

Gary Antonacci, author of Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk

Quantitative Momentum is the story of momentum-based stock selection algorithms. Wes and Jack lucidly explain how and why these systems work.

Narasimhan Jegadeesh, Dean’s Distinguished Chair in Finance at Goizueta Business School

Most investors would assume the “premiere anomaly” is value, when in fact it is momentum.  Let Wes and Jack take you through a MBA course on momentum that will have you saying by the end, “the trend is your friend.”

Meb Faber, CIO of Cambria Investment Management

Wes and Jack have looked under every rock for an edge and they’ve found it with momentum. Momentum is the ‘premier anomaly,’ so no surprise this is their best book yet. Buy it and read it.

Adam Butler, CEO of ReSolve Asset Management

In this excellent work, Wes and Jack have shed some much needed light on an often misunderstood part of investment management. They make bold statements about momentum investing and back it all up with hard facts and verifiable research. It is easy to spot books written by real market professionals with solid industry experience. This is clearly such a book and whether you’re a seasoned pro or a student of the markets, it’s one that you don’t want to miss.

Andreas F. Clenow, CIO Acies Asset Management

Final Thoughts

But while endorsements from informed people may help, you should judge the quality of the book for yourself. Winston Churchill said, “I have nothing to offer but blood, toil, tears and sweat,” and in the end perhaps this is all we can offer as well. Although it took a lot of time and effort, we hope it contributes to our long-run mission to educate investors.

So are you ready for your deep-dive into the momentum anomaly? In short, are you ready to geek out?

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We hope so.

And at a very minimum, Tao Wang, a long-time partner at the firm, would appreciate the support. Tao had the unfortunate predicament of being the only able body on location when our bulk book shipment arrived! He carried a thousand books into our storage area.

 

poor-tao-wang


  • The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).
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  • This site provides NO information on our value ETFs or our momentum ETFs. Please refer to this site.

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About the Author:

Wes Gray
After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.
  • Mark Helm

    Congrats. I pre-ordered a month or two ago. Look forward to reading the book. Anything that helps me understand momentum better is welcomed.

    I suppose like many other advisors, I’ve had a hard time accepting momentum (relative or absolute). Value makes intuitive sense. Momentum seems, well, sketchy. Value appeals to certain personality type (nose to the grindstone guys) while momentum feels like performance chasing, which, I realize, that it’s not.

    However, the evidence was too overwhelming, and I’ve begun to incorporate it directly into my clients’ portfolios.

    Question: What’s the best way to evaluate a fund’s ability to capture the momentum premium at a reasonable cost?

    Is looking at factor loading enough? What about transaction costs? Your momentum fund only has ~50 stocks compared to several hundred for AQR. That has to be a huge cost advantage. However, your ETF is fairly new, so getting decent loading numbers is difficult.

    Anyway, what tools would you suggest advisors use for comparing various momentum funds, including yours. (I suppose I could ask the same question for value funds.)

    Best,
    Mark

  • Thomas

    Congratulations!

    Q: Do you guys ship overseas? Amazon tells me: “Sorry, this item can’t be shipped to your selected address.”

  • Hey Thomas,
    We got it set up with Canada but we can’t do overseas. Recommend you buy direct from Amazon. Sorry about that.

  • Hey Mark,

    Can’t talk about our specific ETFs on here, but can address your questions.

    First, thanks for the support and let us know what you think of the book. Hopefully the book is helpful. Writing it was helpful for both Jack and I. Of course, I still don’t think we really understand momentum, but perhaps we made a step in the right direction.

    re capturing momentum in a fee efficient manner
    Here are some posts we’ve written on this subject:
    https://alphaarchitect.com/2015/10/24/how-to-pick-smart-beta-etfs/
    https://alphaarchitect.com/2015/11/16/how-portfolio-construction-affects-momentum-funds/
    https://alphaarchitect.com/2016/05/13/how-portfolio-construction-affects-value-funds/
    https://blogs.cfainstitute.org/investor/2016/03/30/wheres-the-beef-is-your-low-fee-smart-beta-product-ripping-you-off/
    http://blogs.wsj.com/experts/2016/05/10/why-your-fund-manager-may-not-have-the-same-goal-as-you/

    Bottomline: You want get as much “active momentum risk” per unit of fee paid…and you also want to make sure that the momentum risk you are buying is the one you want (i.e. is the process solid or does it suck). Intuitively, a portfolio of 50 momentum stocks will obviously deliver a lot more momentum risk/exposure than a portfolio of 500.

    re factor loadings. They don’t tell you much. In fact, portfolio characteristics are much more important than factor exposures. See http://www.alexchinco.com/factors-vs-characteristics/ for example, which is a good overview of the research. Put simply, you’d rather own a value fund that owns stock with low P/Es than a value fund that has a high HML loading.

    re tools. We are in the middle of developing some tools to make everyone’s life easier when it comes to addressing the questions you’ve mentioned. We’ve partnered with Jin Choi at https://www.moneygeek.ca/. Jin has a PhD in finance and is also a top-tier developer. We are working to solve these problems.

  • Steve

    It’s here! You must feel like you’ve just had another child!

    Congrats, guys – well done…can’t wait!

  • Both Jack and I already have 3 real kids, so our wives will kill us if I tell them we have another child. ha!

  • Mark Helm

    Wes,

    Thanks. I’ve read some of those articles, but, certainly not all. Your “Where’s the Beef” article is very interesting, though I’m hoping that you and Mr. Choi pander to my lazy side and create a tool that just allows me to plug in some ticker symbols.

    Mr. Chinco’s article is also quite good. I enjoyed his analogy about IQ. (My father did some very low level research – not trashing him, I’m fairly low level myself – on how to design tests. His team’s conclusion: IQ, not bias, explains the vast majority of differences in outcomes. Funny joke/true story my dad told me. Dad: Son, you and your brother and sister have surprisingly similar IQs. Statistically, they should be much further apart. Me: Um, well, that’s great Dad. Dad: No, you don’t understand. You have the lowest IQ of the three of you.) It’s a similar phenomenon to behavioral finance.

    However, all of this forces me to learn more. If factor loading isn’t the best way to evaluate the ability of a fund to capture a premium, then what is? Yea, there are these “characteristics,” but I’ll need both the tools – and, more importantly, the understanding – to evaluate them. Then, I need to turn around and explain it to my clients.

    And, let’s face it, at least with advisors, the key is not so much as having the most clever plan, but being able to explain it to clients so that they feel comfortable with it. My motto is that Discipline Comes Through Understanding.

    Anyway, thanks for the articles. I’ll certainly read them. Also, I’ll be on the look-out for any additional tools that you can provide. My clients long ago accepted tracking error as part of the deal, so it’s my job to give them the best return for their patience.

  • Hey Mark,
    I’ll hit you up via email to discuss further. Lot easier to hop on the phone real quick.
    Visual active share will help answer your question:
    https://alphaarchitect.com/2016/06/23/can-you-spot-the-closet-indexer-introducing-visual-active-share/
    Once we have it up and running we’ll hit you up for comment/insight. Goal is to create tools that make people better investors

  • Brian

    same here. Just ordered from Asia and did not get the discount. But it doesn’t matter because I cannot wait to read the book. Congrats again on the new book !!

  • Thanks!
    We can only do the discount on the inventory we own, unfortunately.
    Wiley owns rights on the book. But we did negotiate them way down on the price for the book (rack rate is $34.95) so we didn’t have another situation like we did with Quantitative Value (rack rate is $85 on that!)