Quantitative Momentum: A Practitioner's Guide to Building a Momentum-Based Stock Selection System (Wiley Finance) 1st Edition

Quantitative Momentum is a must read for any investor employing a Factor-based approach. Dr. Wesley Gray and Dr. Jack Vogel lay out a clear and compelling case for incorporating Momentum into any equity portfolio, particularly one currently focused on Value. While the philosophies underpinning Momentum and Value appear diametrically opposed to each other, the authors conclusively demonstrate that a portfolio comprised of both Momentum and Value picks will provide superior risk-adjusted return than either Factor alone. The book then details how best to build the Momentum side of such a portfolio (Dr. Gray having already thoroughly examined the Value side in Quantitative Value).While the nuances of building a properly structured momentum portfolio are definitely important (and indeed the main purpose of the book), the most interesting takeaways for me were these:Dispassion in the face of dogmaWhether it is Indexing, Technical Analysis, Fundamental Analysis, or something else, most investors follow a religion (or in some cases, more of a cult). Unfortunately, most of these investing religions tend to rely far more on behavioral dispositions rather than rigorous analysis. Even successful practitioners of Value investing (which has significant academic evidence to support it) can fall prey to their own behavioral biases and reject Momentum out of hand without considering the academic evidence. As the book details, this is a significant mistake (especially for Value Investors, who surprisingly have the most to gain from devoting a portion of their portfolio to Momentum). While it isn’t easy or particularly fun, dispassionately combing through the Investment literature to build a rigorous portfolio is the best and only way to achieve superior returns over the long run.Conviction in one’s strategyThe very first chapter is appropriately titled “Less Religion: More Reason.” An important addendum to this maxim would be “More Faith in Reason.” Once you have identified a strategy (such as Momentum) backed by significant academic research and rooted in exploiting well-known behavioral biases, it is critical to stick with that strategy. As the authors repeatedly emphasize, both momentum and value strategies can experience several years of underperformance at a time. Recognizing that these periods are ultimately transitory (though they can be very painful) and staying true to the stock selection system is the most essential part of Factor investing and thereby earning superior returns over the long run.Risk is multifacetedIf I had to level one criticism of the book, it is that while the authors touch on a variety of different risk metrics that are arguably more useful than simple standard deviation and market beta (including some that fall outside the scope of quantifiable metrics such as career risk), they don’t delve into a deeper discussion of which risk metrics are the most pertinent for a practitioner, and how the choice of risk metric can greatly influence portfolio construction. Perhaps this can be the topic of a future book.Education is paramountAs the founder of Hughes Capital Management, educating my clients about Factor Investing and the need for a long time horizon is paramount. Successfully implementing a portfolio based on value, momentum, and other proven Factors is meaningless if your client panics during times of inevitable underperformance and market downturns. The authors highlight the telling case of Ken Heebner’s CGM Focus Fund, a very successful fund by any metric, whose average investor still lost money due to bailing at the absolute worst times. Constructing a clear, evidence-based portfolio that isn’t a black box is perhaps the most important part of the education process and building trust with the client. Quantitative Momentum, along with their earlier Quantitative Value, provides the foundation for that portfolio.

Comprehensive analysis of the techniqueI am very impressed by the step by step approach of covering the momentum trading strategies. I think this is the first time, I have actually understood what momentum is, vs. growth. In case you also dont know: A Growth stock is one usually with a high PE and is considered a high flyer by its future growth prospects, such as say Snapchat. To classify a stock as a momentum stock, one would ignore all such future prospects aspects of a stock, and look only at its price trend. If the price is on a strong uptrend, then its a momentum stock. In facts PE can indeed be low, such as "value" stock in the process of recovering. The fundamentals are of no consideration, only its price history. Gray starts with a basic strategy of buying momentum stocks based on either one year price history or a 52-week high status. So there can be momentum stocks both among the value and the growth stocks. The author analyzes various ways of holding these stocks, 30 days, 60 days or all the way to forever. He finds that a portfolio of about 50 such stocks is required to eliminate the individual company risk. You select 50 such stocks, buy equal dollar amount of each and hold for one month (the most optimum) or longer. His analysis shows that a short time hold results in best returns. Why is short term better - its because there is an inverse relationship between future returns to past returns, stocks that have been going up tend to go down while those in doing poorly usually have better future prospects. So one month covers a most productive period in this strategy. He looks at other analysis parameters, such as the draw down and discusses ways to reduce various risks by introducing stop loss and market trend watching. All in all a very impressive book. Even if the strategy is hard to use for most of us, I did learn a lot, and so will you.

Good introduction to momentum. The introduction to momentum is especially well done. Momentum is a simple concept, but there are some nuances and this books covers many of them.

Wes and Jack provide a fantastic introduction to momentum-based investing. The authors not only walk readers through the basics, but also take a step-by-step building block approach that introduces alternative implementations, potential enhancements, and demonstrate the value of momentum in a portfolio context.The book reads like a casual academic paper, servicing as a thorough treatise on momentum without being heavy handed on prior literature review and significance tests. That is not to say the book is not incredibly rigorous in its presentation of data: it is. Rather, Wes and Jack never seem to lose sight of the fact that they are writing a book meant to serve as an introduction of momentum to a broad audience, and they do a tremendous job at making even the densest material incredibly accessible and enjoyable to read.Perhaps some of the most valuable work comes in the introduction, where the authors establish a framework for what they believe constitutes a sustainable edge. Framing momentum in this context, we are able to evaluate the questions, "why has momentum worked?" and "why do we think it will continue to work in the future?"The value of this framework, however, is that it extends far beyond momentum. Even if readers walk away from this book unconvinced of the merits of momentum, this framework should serve as an excellent guide for the future evaluation of investment strategies.All in all, this book is a quick, enjoyable read that will leave you with a solid foundation for understanding of the what, why, and how of momentum investing.