EC Horse Racing And Value Investing

Momentum and value investing are two classes of strategies that, historically, alternate ascendancy in terms of which strategy is dominating the other. They are largely opposite strategies: a momentum investor buys a security because it has gone higher (because prices aren’t really a random walk, something which has gone up in price is more likely to continue to go up in price) while a value investor buys a security because it has gone lower (since the lower the buying price, the better the return on a security).

You can imagine the two strategies in the context of horse racing. The “momentum” strategy would be represented by betting on the “favorite,” the horse with the best odds to win as determined by the prior betting. (Some people think the track sets the odds on the horses, but that’s not the case. The payouts are based on the proportion of the entire betting pool allocated to bets on a particular horse, less the track’s vig. So, a horse with “good odds of winning” is simply the horse that has the most money bet on it to win.) That’s pretty close to exactly what a momentum investor in stocks is doing, right? A “value” investor, in the context of horse racing, is the person who bets on the long shots because they have big payoffs when they hit (and the bettor believes, obviously, that these unloved horses are irrationally disliked because most people like betting on favorites and winning frequent, small amounts instead of winning infrequent, large amounts.)

So at the track, sometimes the favorites win and sometimes the long shots win, and there are people in each camp that will tell you their strategy is the better one in the long run. I don’t know that there have been many studies of whether “value” or “momentum” investing in horse racing is the better strategy, but there have been numerous such studies in finance. Both value and momentum have been shown to improve investing strategies, with better risk-adjusted returns than simply buying and holding a capitalization-weighted basket of securities. They tend to have “seasons,” by which I mean long periods when one or the other of these strategies tends to be dominant. But it is very unlikely that either of these strategies could ever be the winner over the long run.

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Lorimer Wilson 3 months ago Contributor's comment

The statement by Ashton that " since 2009...the distinction of “growth” and “value” are now less important than the single factor 'momentum'".

That being the case it is imperative to better understand exactly how "momentum" is impacting your securities of interest and this article (www.munknee.com/timing-the-market-using-momentum-indicators/) does just that.

Specifically, it:

>assesses the relative levels of greed and fear in the market at a given point in time,

>outlines the 6 most popular momentum indicators and

>explains how, why and where they should each be used.

If properly applied the above momentum indicators go a long way to support my article's opening sentence "Yes, you can time the market!" Do you agree?