Results are hypothetical, are NOT an indicator of future results, and do NOT represent returns that any investor actually attained.
Robustness
My research paper, ‘Absolute Momentum: A Simple Rule-Based Strategy and Trend Following Overlay’ showed the effectiveness of absolute momentum across eight different markets from 1974 through 2012. Moskowitz et al (2011) demonstrated the efficacy of absolute momentum from 1965 through 2011 when applied to equity index, currency, commodity, and bond futures. In ‘215 Years of Global Asset Momentum: 1800–2014’, Geczy & Samonov (2015) showed that both relative and absolute momentum outperformed buy-and-hold from 1801 up to the present time when applied to stocks, stock indices, sectors, bonds, currencies, and commodities.
Greyserman & Kaminski (2014) performed the longest ever study of trend-following. Using trend following momentum from 1695 through 2013, they found that stock indices had higher returns and higher Sharpe ratios than a buy-and-hold approach. The chance of large drawdowns was also small compared to buy-and-hold. The authors found similar results in 84 bond, currency, and commodity markets all the way back to the year 1223! Talk about confidence building. These kinds of results are what give me the ability to stay with absolute momentum under all market conditions.
Market Overreaction
I have some clients though who are less familiar with and sanguine about trend following. They still get nervous during times of market stress, such as August of 2015. They need to also understand that stocks do not trend all the time. The stock market can overextend itself and mean revert over the short run. During such times it is important for investors to stay the course and not overreact to short-term volatility.
To remind me to remind others about short-term mean reversion, I have this coffee mug in my office:
Source: Quotatium.com
This tells me to ignore market noise and calmly accept occasional market overreactions that are often followed by mean reversion.
There is no way to get rid of short-term volatility and still earn high returns from our investments. We should, in fact, embrace short-term volatility since it is what leads to superior returns over the long run.
What to Remember
Rigorous academic research confirms the existence of trend persistence and short-term mean reversion. Whatever your investment approach, if you respect these two forces you should be able to invest with comfort and conviction. Being aware of these principles gives us the two qualities required for long-run investment success. First is the discipline we need to follow one’s proven methods unwaveringly. The second is patience.
Warren Buffett said the stock market is a mechanism for transferring wealth from the impatient to the patient. Like Buffett, we also need to patiently accept inevitable periods of short-term volatility and underperformance with respect to our benchmarks.
If you have trouble always remembering the concepts of trend persistence and mean reversion, then do what I do. Get yourself a poster and coffee mug.
About Gary Antonacci
Gary Antonacci is author of the award-winning book, Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk. His research introduced the investment world to dual momentum, which combines relative strength price momentum with trend following absolute momentum.
His research on momentum investing was the first place winner in 2012 and the second place winner in 2011 of the Wagner Awards for Advances in Active Investment Management given annually by the National Association of Active Investment Managers (NAAIM).
He received his MBA degree from the Harvard Business School in 1978. Since then, he has concentrated on researching, developing, and applying innovative investment strategies that have their basis in academic research.
‘Sustainable Sources of Competitive Advantage’ by Morgan Housel
David Paul Gregg invented the CD, which is amazing and changed history. But you’ve probably never heard of him because CDs aren’t difficult to make, and lost relevance over time.
Most things work this way. As soon as a smart product or business idea becomes popular, the urge to copy it and commoditize it is the strongest force economics can unleash. Jeff Bezos summed this up when he said “Your margin is my opportunity.”
The key to business and investing success isn’t finding an advantage. It’s having a sustainable advantage. Something that others either can’t or aren’t willing to copy once your idea is exposed and patents expire.
Finding something others can’t do is nearly impossible. Intelligence is not a sustainable source of competitive advantage because the world is full of smart people, and a lot of what used to count as intelligence is now automated.
That leaves doing something others aren’t willing to do as the top source of sustainable competitive advantage.
Here are five big ones.
The ability to learn faster than your competition
Someone with a 110 IQ but the ability to recognize when the world changes will always beat the person with a 140 IQ and rigid beliefs. The world is filled with smart people who get nowhere because their intelligence was acquired 20 or 30 years ago in a vastly different world than we live in today. And since intelligence has a lot of sunk costs – college is expensive and hard, for example – people tend to cling to what they learn, even while the world around them constantly changes. So the ability to realize when you’re wrong and when things changed can be more effective than an ability to solve problems that are no longer relevant. This seems obvious until you watch, say, Kodak or Sears trying to solve 1980s problems in the 2000s.
Marc Andreessen promotes the idea of “strong beliefs, weakly held,” which I love. Few things are more powerful than strongly believing in an idea (focus) but being willing to let go of it when it’s proven wrong or outdated (humility).
The ability to empathize with customers more
than your competition
Forty-seven percent of mutual fund mangers do not personally own any of their own fund, according to Morningstar. That’s shocking. But I suspect something similar happens across most businesses.
What percentage of McDonald’s executives frequent their own restaurant as a legitimate customer interested in the chain’s food, rather than a fact-finding mission? Few, I imagine. How many times has the CEO of Delta Airlines been bumped from a flight, or had his bags lost by the airline? Never, I assume.
The inability to understand how your customers experience your product almost guarantees an eventual drift between the problems a business tries to solve and the problems customers need solved. Here again, a person with a lower IQ who can empathize with customers will almost always beat someone with a higher IQ who can’t put themselves in customers’ shoes. This was apparent in the 2016 US presidential election, when understanding the electorate’s mood far exceeded the power of traditional campaign strategies.
It’s also why the best writers are voracious readers. They know exactly what readers want and don’t want because they themselves are customers of content.
The ability to communicate more effectively
than your competition
Business success doesn’t necessarily go to those with the best product. It goes to whoever is the most persuasive. George Soros may be one of the brightest minds in finance, but he would fail miserably as a financial advisor. Not one person in ten who reads his books understands what the hell he’s talking about.
Most business edges are found at the intersection of trust and simplicity. Both rely on the ability to tell customers what and why you’re doing something before losing their attention.
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