Monday, May 23, 2005
Time to bring on the Momo Moose
Down $2000, in what is become more the rule than the exception. Though my portfolio has gone largely nowhere over the past few weeks while the market has posted big gains, I am not ready to give up on what has been an immensely successful stock picking strategy, one that has generated terrfic results for me over the past 5 years. Indeed, I added another value stock to my portfolio today: Factory Card and Outlet. It's classic Stockcoach: trading below book value; P/S ratio of 0.1; and gross profits three times market cap. The earnings have been lackluster, but the company has implemented a new strategy, and it seems to be yielding good early results.
Nevertheless, despite my predilection for investing in small cap value stocks, I am beginning to think that I can do better. Thus, in addition to the value approach, I will try something new.
Bring on the Momentum Moose!
What heresy you say. Not quite. You see, there is a good reason to combine a momentum strategy with a value based strategy. One, momentum is a valid strategy, which has been shown to work in study after study, with Jegadeesh and Titman's 1993 paper being the seminal one in the field. Two, momentum and value strategies tend to be negatively correlated (for example, during the NASDAQ bubble, momentum was the way to go, while value strategies went no where; after the bubble burst, value strategies worked well while investing in past winners would have cost you a bundle of money). So combining the two strategies can lower one's overall risk without reducing expected return. And that's always a good thing!
Nevertheless, despite my predilection for investing in small cap value stocks, I am beginning to think that I can do better. Thus, in addition to the value approach, I will try something new.
Bring on the Momentum Moose!
What heresy you say. Not quite. You see, there is a good reason to combine a momentum strategy with a value based strategy. One, momentum is a valid strategy, which has been shown to work in study after study, with Jegadeesh and Titman's 1993 paper being the seminal one in the field. Two, momentum and value strategies tend to be negatively correlated (for example, during the NASDAQ bubble, momentum was the way to go, while value strategies went no where; after the bubble burst, value strategies worked well while investing in past winners would have cost you a bundle of money). So combining the two strategies can lower one's overall risk without reducing expected return. And that's always a good thing!
# posted by Stockcoach @ 7:12 PM 
