Imagine that you spend a few minutes a month to manage your investment. All is rule-based, statistically significant, simple and logical. No place for discretionary decisions, no guessing, no gut feeling, no forecasting. And in the long-term, you are almost sure to beat all the actively managed investment funds on the market. Sounds like a scam? Well, everyone should verify everything, but once you do it in this case, you will find out that the name of the presented strategy in this episode, Global Equity Momentum, GEM, is truly a gem.
I am so much impressed by the research work done by Gary Antonacci, guest of this podcast episode. To me, it’s just amazing that he contributed more to the financial industry than so many university researchers out there. He’s a practitioner, rather than a man trying to create another great looking theory, which may seem elegant and appealing but is useless. Fisher Black said once that “The theory is right. It just doesn’t work.” Gary proposed a straightforward yet very effective model based on anomaly which proved to be working for hundreds of years — momentum.
Gary has over 40 years’ experience as an investment professional. After receiving his MBA degree from the Harvard Business School he concentrated on researching and developing innovative investment strategies that have their basis in academic research.
Gary’s innovative research on momentum investing was the first-place winner in 2012 and the second-place winner in 2011 of the prestigious Wagner Awards for Advances in Active Investment Management given annually by the National Association of Active Investment Managers.
To be a good winner over the long run, you need to be a good loser over the short run. You can do this if you have a proven edge, a simple approach, and realistic expectations.
In this episode
- A very short overview of modern finance (Efficient Market Hypothesis, Markowitz Mean-Variance Optimization, Capital Asset Pricing Model, Black-Scholes Option Pricing) and why a healthy dose of scepticism towards some highly acclaimed experts is a good thing?
- An interesting story behind the first index fund at Smith Barney & Co. from 1976.
- Why smart-beta ETFs based on momentum cannot beat the market?
- Is value a robust driver for abnormal returns?
- What momentum anomaly is, why it works, what are the behavioural basis for momentum?
- Two types of momentum: relative (cross-sectional) and absolute (time series momentum).
- Why your absolute momentum approach is not based on widely known and used moving averages, for example, 200-days moving average or 10-month moving average?
- Why it makes more sense to use absolute momentum on the broad-based stock index rather than individual stocks?
- Would stop losses applied on momentum help?
- On which timeframes momentum works best?
- On which asset class momentum works best?
- Momentum vs Mean Reversion
- What is Dual Momentum?
- Global Equities Momentum (GEM) as a very simple application of Dual Momentum
- Main advantages of Dual Momentum?
- What are the main risk factors related to Dual Momentum?
- Using Dollar Cost Averaging (DCA) with Dual Momentum
- Equity line trading applied on Dual Momentum
- Why Dual Momentum hasn’t attracted more interest, especially from institutional investors?
- Other ways of using dual momentum: Dual Momentum Sector Rotation (DMSR) and Global Balanced Momentum (GBM).
- How should we approach the model backtesting to avoid curve-fitting, data snooping and selection bias?
- How much data is enough to test our long-term idea?
- Could we periodically re-optimize look-back period in GEM to adapt to market changes?
- Using more than one look-back period at a time for GEM?
- Criticism of Dual Momentum
- Can an average investor/trader compete with professionals like hedge-funds?
- What are the main momentum investors mistakes — why as human beings we are poor investors?
- Can rule-based, systematic trading approach be easier to be correctly and successfully applied than a discretionary approach?
- Tools used by Gary for modelling (programming languages, libraries, software packages, etc.)
Simple is good, since it means less chance of overfitting the data. Synergy happens when you combine simple absolute momentum with simple relative momentum. Over the long run, relative momentum offsets the underperformance of absolute momentum in bull markets. Absolute momentum, unlike relative momentum, can side step severe bear market drawdowns. This complementary combination can boost profits while also reducing bear market risk exposure.
Some useful links
- Gary’s blog with lots of amazing articles
- Gary’s website
- Recommended literature and articles
- Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk, McGraw-Hill Education, First Edition, Gary Antonacci, 2014
- Extended Backtest of Global Equities Momentum
- History of Momentum Research
- Risk Tolerance Assessment
- What You Should Remember About the Markets
- The Evolution of Investing
- Risk Premia Harvesting Through Dual Momentum
- Momentum Back Testing
- Fact, Fiction, and Momentum Investing
- Value and Momentum Revisited
- Individual Stock Momentum – That Dog Won’t Hunt?
- Diversification or Deworsification?
- Absolute Momentum Revisited
- Dual, Relative & Absolute Momentum
- Dual Momentum for non-US Investors
- Momentum and Stop Losses
- Momentum Due Diligence
- Why Is Momentum Neglected?
- Dual Momentum and Dollar Cost Averaging
- Momentum for Buy-and-Hold Investors
- Smart Beta Is Still Just Beta
- Mistakes of Momentum Investors
- Lessons Learned from Sports Investing
- The Role of Shorting, Firm Size, and Time on Market Anomalies
- GEM track record
- Criticism of Dual Momentum
- People mentioned in this episode
- Louis Bacon
- John W. Henry
- Perry Kaufman
- Valeriy Zakamulin
- Kathryn M. Kaminski
- Edward Thorp
- Tobias J. Moskowitz
- Narasimhan Jegadeesh
- Sheridan Titman
- Tom Basso
- Corey Hoffstein
- Michael Harris
- Paul Tudor Jones
- David Rapach
- Robert J. Shiller
- Richard Dennis
- Fischer Black
- Myron Scholes
- Harry Markowitz
- Kenneth R. French
- Euegene Fama
Simplicity is the final achievement. After one has played a vast quantity of notes and more notes, it is simplicity that emerges as the crowning reward of art.
Simplicity is a great virtue, but it requires hard work to achieve it and education to appreciate it. And to make matters worse, complexity sells better.
Comments are welcome!
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