Learning From Cliff Asness’ Conversation With Tyler


On Momentum

A momentum investing strategy is the rather insane proposition that you can buy a portfolio of what’s been going up for the last 6 to 12 months, sell a portfolio of what’s been going down for the last 6 to 12 months, and you beat the market. Unfortunately for sanity, that seems to be true.

Momentum in my opinion has survived 200 out-of-sample tests, through time, different asset classes. I don’t believe that one but to be intellectually honest, you never reduce that probability to zero. You just make it lower. As it works again, you go “chance you’re just lucky, smaller.”

On Small Caps

Almost anything we find in investing, almost any regularity, “this tends to beat this,” seems to be larger for small stocks. That is not quite as good a deal as it sounds, because the risk is also larger. Small‑caps have bigger fluctuations. People have a lot of theories. Analysts’ coverage, Wall Street doesn’t cover them as much, perhaps whatever degree of inefficiency in the market is larger for small‑caps. But it’s a nearly ubiquitous finding. Anything you find works in large‑caps tends to work somewhat better in small.

On Value Investing

Value investing at a longer time horizon, buying what’s cheap in pretty much any way (price divided by something reasonable, price divided by earnings, books, sales.) Just buying five-year losers, five-year stocks that have suffered, and selling or underweighting the opposite is also a very good strategy, very much the opposite in spirit to momentum.

On differences between Momentum and Value

They are momentum investors at a value time horizon. Remember, I told you value works long term. You have to hold 3, 5, 10 years. Momentum is a 6 to 12 month horizon.

If you’re going to be momentum, you’ve got to really do it. You’ve got to be disciplined. You’ve got to come in every day, and you’ve got to count on these under- and overreaction things. If you wait five years and buy what’s worked for five years, you can call that a negative value investor or a momentum investor working with the wrong numbers. I do think that is one of the things people do too much out there. It’s probably the biggest.

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