Living in a Momentum World
Rekenthaler defends momentum, the last market anomaly left standing.
Momentum investing is smoking. (By momentum investing, I mean the practice of buying a stock simply because it has already risen.) In 1999, the Nasdaq Composite had the greatest gain ever for a major U.S. stock index, and so far this year it is appreciating at an even-faster clip. Propelling the index has been a horde of huge winners. Over the past 12 months, 200 Nasdaq National Market stocks have gained more than 500%, and almost 300 more between 300% and 500%. Heck, you don’t need the numbers to know the story. Just listen to almost any investment conversation.
You probably think I’m going to bemoan the existence of all these thoughtless investors who think doing investment homework means checking the stock chart. Wrong. Loving momentum is quite logical. Of all the market "anomalies," momentum is the last one standing. The January effect is long gone, small companies have been choppy, and value investors are sooo "old economy." But momentum keeps on chugging. Even Gene Fama, the high priest of the efficient-markets sect, grants that the strategy has worked, for reasons that he can’t explain.