Andrew Chen recently was a guest on Rational Reminder, he is an Economist with the Federal Reserve who has done important work on market data and asset prices, his conclusion was that factor premiums disappeared about 2005 and that investors do not achieve factor premiums after cost. He did leave open the possibility that premiums are achievable if you combine factors. He did say the factor premiums that the researchers found in the past were real and he had confidence in the data. I started a thread on this podcast and dubbed the date it was released (August 1st, 2024) as the "Day the Factors Died" alluding to the plane crash in 1959 (February 3, 1959) that killed three prominent musicians: Buddy Holly, Ritchie Valens, and The Big Bopper. Lots of good discussion there.
One of the most-believed-in factors is value. Unfortunately, value and momentum have negative correlation, so they fight against each other. If you have decided not to invest in value, then you are clear for investing in momentum. Otherwise, it is a tricky balancing act and you will have to read how the factor mavens try to do it.
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If you want to combine factors, your best bet is to use the funds provided by the original practitioners of this discipline: Dimensional Fund Advisors and the DFA mini-me Avantis at American Century which was started by and mostly staffed by former DFA employees. DFA and Avantis both combine factors in their investing disciplines. For example, DFA will set Momentum to neutral in their Value funds and also load a bit on Quality. Avantis seems to be combining Value with Quality. Using the DFA and Avantis ETFs, which are available to retail investors, seems to give one the best shot of doing this. If you want to combine Value and Momentum, DFA would probably be the best choice.
That Value is associated with negative Momentum is something that I have observed with my attempt to execute a Value discipline with individual stocks. It has been my experience that most of the time, Value stocks will continue to fall after you have purchased them, which pretty much is the definition of negative momentum.
This is why when you buy Value stocks, you pay attention to the story or narrative that you have concerning why you expect this stock to do well sometime in the future. There might be a change of management, the stock returning to favor on Wall Street, exciting new products in the pipeline, etc. In other words, you need not only to have patience but there needs to exist a catalyst, something that will happen in the future that will move the stock price. I recently had this experience with Kenvue stock, a spin-off from parent company Johnson & Johnson, the stock fell after buying some and now a few months later is finally above what I paid for it.
In this light, setting momentum to zero makes perfect sense, in other words you not only buy the stock because it is cheap but you do so after the price stops falling. Harder to do as an investor trying to do-it-yourself with individual stocks but DFA could do this with patient trading techniques executed by a team of professional traders. It seems to me that you will have much less problem with Momentum reversals with out of favor and boring Value stocks than you would with more popular and more aggressive Growth stocks. DFA does this, Avantis doesn't seem as interested as DFA in the Momentum factor.
Statistics: Posted by nedsaid — Thu Aug 22, 2024 9:35 pm — Replies 10 — Views 1365