Momentum Investing: The Art of Buying High and Selling Higher
Momentum Investing: The Art of Buying High and Selling Higher
EXECUTIVE SUMMARY
- The Anomaly: According to the Efficient Market Hypothesis, past prices shouldn’t predict future returns. Yet, 200 years of data proves that assets which performed well in the recent past (6-12 months) tend to continue outperforming in the near future. This is the Momentum Factor.
- The Psychology: Momentum exists because human beings underreact to new information (slow anchoring) and then overreact (FOMO). By the time the herd realizes a trend is real, the “Momentum Investor” is already riding the wave.
- The Strategy: Instead of guessing tops and bottoms, you systematically buy the winners (Relative Strength) and sell the losers. It requires zero forecastingโonly discipline.
“Buy Low, Sell High” feels intuitive. “Buy High, Sell Higher” feels reckless. But in financial physics, Newton’s First Law applies: An object in motion tends to stay in motion. Momentum is the premier anomaly in finance. It has been documented in stocks, bonds, commodities, and currencies since the 1800s. It is not about chasing hype; it is about mathematically aligning your portfolio with the market’s strongest currents. Source: Jegadeesh & Titman (1993) / AQR Capital Management
Gary Antonacci’s “Dual Momentum” combines two powerful filters.
- 1. Absolute Momentum (Trend): Is the asset going up?
Rule: If the S&P 500 is below its 12-month moving average (or cash return), sell it and move to Cash/Bonds. This prevents holding falling knives. - 2. Relative Momentum (Strength): Which asset is going up faster?
Rule: Compare US Stocks vs. International Stocks vs. Gold. Buy only the one with the highest 12-month return. - Result: You are always in the strongest asset class, and you sit in cash during bear markets.
Performance: Value vs. Momentum (1927-2023)
| Factor Strategy | Annualized Excess Return (%) |
|---|---|
| Value (Buying Cheap) | 4.8 |
| Momentum (Buying Winners) | 6.2 |
*Momentum has historically delivered higher returns than Value, but with higher turnover and volatility.
CRITICAL SCENARIO: The 2008 Financial Crisis
Did Momentum save investors?
| Strategy | Max Drawdown (2008) | Return (2008) |
|---|---|---|
| S&P 500 (Buy & Hold) | -51 | -37 |
| Trend/Momentum (GEM Strategy) | -15 | 18 |
Execution Protocol
If you don’t want to calculate signals, buy a Momentum ETF.
Core: MTUM (MSCI USA Momentum) or QMOM (Quantitative Momentum). These funds automatically rebalance into the highest-performing stocks every quarter.
Once a month, check the 12-month returns of SPY (US), VEA (Intl), and BIL (Cash).
Step A: Is SPY or VEA higher than BIL? (Yes = Bull Market).
Step B: Which is higher, SPY or VEA? Buy 100% of the winner.
Momentum’s weakness is a sideways/choppy market. You might buy an asset just as it peaks, then sell it just as it bounces (a “Whipsaw”). This small bleeding is the “insurance premium” you pay to avoid massive bear markets.
WEALTH STRATEGY DIRECTIVE
- Do This: Dedicate 10-20% of your portfolio to a Trend/Momentum strategy. It acts as a diversifier because it can go “Long Volatility” (moving to cash/bonds) when traditional stocks crash.
- Avoid This: Ignoring transaction costs. Momentum requires frequent trading (high turnover). Always implement this in a Tax-Advantaged Account (IRA/401k) to avoid capital gains tax drag.
Frequently Asked Questions
Is this just “Performance Chasing”?
Performance chasing is emotional (buying the top of a bubble). Momentum is systematic (buying based on strict rules). The difference is the exit strategy. Performance chasers never sell; Momentum investors sell ruthlessly when the trend breaks.
Does it work with Crypto?
Yes. Momentum is arguably stronger in crypto because retail emotion dominates that market. Simple trend-following rules (e.g., above 200-day moving average) have historically avoided 80% drawdowns in Bitcoin.
Value vs. Momentum?
They work best together. They are negatively correlated. Often, when Value is dead (late 90s), Momentum screams. When Momentum crashes (2009 reversal), Value recovers. Holding both creates a smoother ride.