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Debunking 10 Momentum Investing Myths

Investor-Update
Momentum strategies seek out stocks that have done well in the past (winners), though they can also short stocks with past poor returns (losers). The idea is to take advantage of the return premium from favoring winners over losers. Such strategies have their share of critics, however. Among the criticisms are that momentum is not exploitable by the average investor and that such strategies are more volatile.

Clifford Asness, Andrea Frazzini and Ronen Israel of AQR Capital Management and Tobias Moskowitz of the University of Chicago pushed back. In a paper published in the 40th anniversary issue of the Journal of Portfolio Management, they debunk the 10 “myths” they say exist about momentum. I’ll give a summary of their arguments here. For those who want to see the full paper and do not have access to the magazine, a version is available on the SSRN website.

Myth #1. Momentum Returns Are Too Small and Sporadic: Over long periods, momentum has performed better than small company size and value. During the period of 1927 through 2013, the return difference between small stocks and large stocks has averaged 2.9% annually, cheap versus expensive stocks has averaged 4.7% annually and the recent winners over recent losers has averaged 8.3%.

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