Forum Topics Value vs Momentum
ArrowTrades
2 years ago

I came across a debate between a value investor and a momentum trader on Twitter for about the 500th time. If you ask me they are both wasting their breath arguing over which is better and why etc.

There is plenty of data backing up both strategies, suggesting both are factors that create alpha. So, what does that tell you? To me it says it is about execution.

For example, take two investors outperforming the market. Alice is a value investor and Bob is a momentum investor. Alice discovers a stock trading far too cheap and buys it for a $1. She patiently waits and eventually the company deliver and the market rerates the stock to 2 dollars. She decides it’s run too far and no longer cheap and decides to sell. The same stock shows up on bobs radar as a stock heading up with a good story, improved liquidity and currently on people’s radar and he decides to buy a $2. 

So how are both these people are outperforming, surely one is making a good decision to buy or sell and the other is not. But these two people are not necessarily competing against each other and it is possible that they are both making a good decision.

Alpha is a zero-sum game and there are plenty of ways to create it, but you need to beat the people that are playing the same or similar game to you. “You Need an EDGE, in the specific game you are playing” 

Arguing over which is better is kind of moot or just semantics. Find a strategy that is best suited to you, understand exactly which game you are playing, no your strategy intimately and execute it well. 

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Rick
2 years ago

Hi @ArrowTrades

Why not Value + Momentum? With kudos to @Solvetheriddlefor a straw in the technical analysis forum I’ve adapted the strategy into a diagram which I look forward to experimenting with. Hopefully to avoid some of the falling knives on entry point!

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Cheers, Rick

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Hands
2 years ago

Anyone know a trading or stocks platform that can identify stocks with momentum / relative strength index/ MACD etc of a certain number?

I'm looking for something that can sort stocks by this criteria.

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ArrowTrades
2 years ago

For sure, as I said whatever works for you. I personally blend different strategies all the time.

I remember listening to a podcast where they were talking about a study that compared some well-known value gurus versus a systematic computer strategy that invested in the same philosophies of those gurus. The systematic strategy convincingly outperformed the actual gurus. Part of the theory was that the purchases were very similar but the systematic strategy had a time-based sell approach (eg sell after 3 years) and as a result it would often hold stocks that the gurus would have deemed far too expensive and would have sold long ago. The systematic version was capturing some of the benefits of momentum.

I will often buy something because I think it’s cheap and then at the point where I think that is no longer the case rather than sell, “If” it fits the characteristics of a momentum play I will continue to hold changing only the way I treat the position ie: When it’s cheap I would consider buying more if it fell, now as a momentum play I would be looking to cut if it fell or employ some type of trailing stop loss. The benefits I see doing this are:

-Less transactions and costs 

-Tax deferral benefits, plus more 12month CGT discounts from holding longer.

-Acts as a strategy diversifier.

-Trying to capture momentum alpha.

Another simple angle to combine value & momentum, is find a stock that has been beaten down, but has formed a base and is now starting to trend up. Feels like there are plenty of those around atm after some brutal tax loss selling.

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