Information about Momentum Investing
Momentum investing is a system of buying stocks or other securities that have had high returns over the past three to twelve months, and selling those that have had poor returns over the same period. It has been reported that this strategy yields average returns of 1% per month for the following 3-12 months as shown by Narasimhan Jegadeesh and Sheridan Titman.
While no consensus exists about the validity of this claim, economists have trouble reconciling this phenomenon using efficient market theory. Two main hypotheses have been submitted to explain the effect in terms of an efficient market. In the first, it is assumed that momentum investors bear significant risk for assuming this strategy, and thus the high returns are compensation for the risk. The second theory assumes that momentum investors are exploiting behavioral shortcomings in other investors, such as investor herding, investor over and underreaction, and confirmation bias.
Seasonal effects may help to explain some of the reason for success in the momentum investing strategy. If a stock has performed poorly for months leading up to the end of the year, investors may decide to sell their holdings for tax purposes. Increased supply of shares in the market drive its price down, causing others to sell. Once the reason for tax selling is eliminated, the stock's price tends to recover.
Some investors may react to the inefficient pricing of a stock caused by momentum investing by using the tool of arbitrage.
It is believed that George Soros (1987) used a variation of momentum investing by bidding the price up of already overvalued equities in the market for conglomorates in the 1960's and Real Estate Investment Trusts in the 1970's. This strategy is termed positive feedback investing.
Richard Driehaus, the founder of Driehaus Capital Management, Inc., is widely considered the father of momentum investing. This Chicago money manager takes exception with the old stock market adage of buying low and selling high. According to him, "far more money is made buying high and selling at even higher prices."
While no consensus exists about the validity of this claim, economists have trouble reconciling this phenomenon using efficient market theory. Two main hypotheses have been submitted to explain the effect in terms of an efficient market. In the first, it is assumed that momentum investors bear significant risk for assuming this strategy, and thus the high returns are compensation for the risk. The second theory assumes that momentum investors are exploiting behavioral shortcomings in other investors, such as investor herding, investor over and underreaction, and confirmation bias.
Seasonal effects may help to explain some of the reason for success in the momentum investing strategy. If a stock has performed poorly for months leading up to the end of the year, investors may decide to sell their holdings for tax purposes. Increased supply of shares in the market drive its price down, causing others to sell. Once the reason for tax selling is eliminated, the stock's price tends to recover.
Some investors may react to the inefficient pricing of a stock caused by momentum investing by using the tool of arbitrage.
It is believed that George Soros (1987) used a variation of momentum investing by bidding the price up of already overvalued equities in the market for conglomorates in the 1960's and Real Estate Investment Trusts in the 1970's. This strategy is termed positive feedback investing.
Richard Driehaus, the founder of Driehaus Capital Management, Inc., is widely considered the father of momentum investing. This Chicago money manager takes exception with the old stock market adage of buying low and selling high. According to him, "far more money is made buying high and selling at even higher prices."
References
- Jegadeesh, Narasimhan and Titman, Sheridan, 1993, Returns to buying winners and selling losers: Implications for stock market efficiency, Journal of Finance 48, 65-91.
- Schwager, Jack D., 1992, The New Market Wizards: Conversations With America's Top Traders, John Wiley & Sons, Inc., NY, p. 224, ISBN 0-471-13236-5.
- Soros, George, 1987, The Alchemy of Finance, Simon and Shuster, New York.
- Tanous, Peter J., 1997, Investment Gurus, New York Institute of Finance, NJ, ISBN 0-7352-0069-6.
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In financial markets, the stock capital of a corporation or a joint-stock company is the capital raised through the issuance, sale and distribution of shares. A person or organization that holds at least a partial share of stock is called a shareholder.
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security is a fungible, negotiable instrument representing financial value. Securities are broadly categorized into debt securities, such as bonds and debentures, and equity securities, e.g. common stocks. The company or other entity issuing the security is called the issuer.
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Yield may mean:
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Sheridan Titman holds the McAllister Centennial Chair in Financial Services at the University of Texas and is a research associate of the National Bureau of Economic Research. He has a B.S. from the University of Colorado and an M.S. and Ph.D. from Carnegie Mellon University.
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economist is an expert in the social science of economics.[1] The individual may also study, develop, and apply theories and concepts from economics and write about economic policy.
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In finance, the efficient market hypothesis (EMH) asserts that financial markets are "informationally efficient", or that prices on traded assets, e.g., stocks, bonds, or property, already reflect all known information and therefore are unbiased in the sense that they reflect the
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For the Parker Brothers board game, see risk (game)
Risk is a concept that denotes a potential negative impact to an asset or some characteristic of value that may arise from some present process or future event.
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Risk is a concept that denotes a potential negative impact to an asset or some characteristic of value that may arise from some present process or future event.
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In psychology and cognitive science, confirmation bias is a tendency to search for or interpret new information in a way that confirms one's preconceptions and avoid information and interpretations which contradict prior beliefs.
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In economics and finance, arbitrage is the practice of taking advantage of a price differential between two or more markets: a combination of matching deals are struck that capitalize upon the imbalance, the profit being the difference between the market prices.
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George Soros (pronounced [ʃoroʃ]) (born August 12, 1930, in Budapest, Hungary, as György Schwartz) is an American financial speculator, stock investor, philanthropist, and political activist.
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A Real Estate Investment Trust or REIT (pronounced /ɹiːt/) is a tax designation for a corporation investing in real estate that reduces or eliminates corporate income taxes.
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Richard H. Driehaus ( born 1942 in Chicago) is a fund manager, businessman and philanthropist founder, Chief Investment Officer and chairman of Driehaus Capital Management based in Chicago, a firm which manages U.S. $3 billion.
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Investment management is the professional management of various securities (shares, bonds etc) assets (e.g. real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.
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