#$mtum

Image Shown: An ETF that measures momentum (MTUM) has done considerably better than the S&P 500 since the beginning of 2017. Among its top 5 holdings are Microsoft (MSFT), Apple (AAPL), Boeing (BA)—newsletter holdings that have had excellent value characteristics along the way. Visa (V) is also included in its top 10 holdings.

Even some the most bullish and optimistic investors have been surprised by the resiliency of today’s market environment. Why does it seem appropriate to remind members that the stock market doesn’t always go straight up with almost no volatility?

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By Brian Nelson, CFA

What a great start to the New Year!

The Dow Jones Industrial Average (DIA) and the S&P 500 (SPY) are up more than 4% so far this year, while the Nasdaq (QQQ) has been on a tear, up 5%, marking the best start since 2004, according to Seeking Alpha. It truly is incredible. I’m sure many of you reading this now were in the markets during the Global Financial Crisis and during the Great Recession, and many of you probably also remember the dot-com bubble and bust of the late 1990s/early 2000s, but you’d have to go back to the Crash of 1987 to capture the third most recent bear market, more than 30 years ago now. According to First Trust, the current bull market is nearly 9 years old, representing a total return of ~385% and an annualized return of ~18%, this following the collapse in 2008-2009, which sent stocks down more than half and some of the most prestigious banks (XLF) belly up.

Though we continue to believe that readers should exercise caution due to existing stock market valuations, which are frothy regardless of how you measure them, whether it’s the forward price-to-earnings ratio on the S&P 500, or the cyclically adjusted price-to-earnings ratio, or the market-cap-to-GDP ratio. But that may not matter. What many seem to be caught up on is that we are currently in a bull market, and that means that investors buy, and they hold, and without meaningful volatility in the markets these days, there’s not much to give the long-term investor to think about when it comes to reasons to sell. The self-perpetuating cycle of a steadily-increasing market with ultra-low volatility has taken many an investor by surprise, and even the most experienced of market observers can hardly believe it. We’d be remiss to say that the current magnitude and duration of the ongoing bull market is unusual, however. Perhaps this may be where optimists are gathering excitement.

For starters, if you look at the bull market that ended with the dot-com bust, stocks advanced more than 816%, representing an annualized return of ~19%, from the Crash of 1987. It took nearly 13 years to achieve this remarkable run. If we go back to the bull market than ended with the Crash of 1987, that was a near-13-year run, too, with a return of more than 845%, marking a 19% annualized return, too. There have been two other bull markets in market history with durations of nearly 14 years and over 15 years, with total returns of 800%+ and 900%+, respectively, meaning that today’s bull market could still be in the middle innings if history is any guide and if it is of the longer-duration variety. The average duration of a bull market is ~9 years, however, with average cumulative total return of 480%, meaning that if today’s bull market is only of the average variety, it is starting to get long in the tooth.

How did we get here? For starters, ultra-low interest rates and a flood of liquidity by the Fed, which has caused many an investor to jump into risky assets for yields. Second, the proliferation of indexing and/or buy-and-hold investors that aren’t paying attention to the price-to-fair value equation, but instead to other considerations (“put money to work” and the like), is generating a buy-at-any-price mentality, what many consider to be the primary cause of any stock market bubble. Third, a generally strong US economy that has not been exposed to exogenous shocks or systemic events for some time, though one could possibly point to Brexit (EWU), the London Whale incident, the property/stock markets in China (FXI, KWEB), or even the threat of nuclear war with North Korea--but nobody seems to care. Fourth, the March 2009 panic bottom may have been the greatest cause of this bull market, a generational low, perhaps shaking out some of the most reasonable and/or most emotional of investors for good, and they may have never come back.

For some to have witnessed this much wealth evaporate during such a recent event as the Financial Crisis, for example, it’s hard to believe that the stock market could ever be considered a long-term wealth creator--but it has bounced back, and it may very well be because of the idea that the market has bounced back from the depths of ruin in late last decade, and in a big way, that investors may no longer be paying attention to it. They may say: “Buy and hold. Index. Reinvest Those Dividends. Keep Putting Money to Work. Get Started Saving as Early as Possible.” After all, if today’s investor believes the market always goes up, will it continue to be a self-fulfilling prophecy? Or will game theory take over and that one incremental investor that decides to get out eventually lead to the beginning of the end of this bull market? It has to end some time, right? Here’s the real deal: the bull market is going to work until it doesn’t, and valuations aren’t going to matter until they do. Unlike bull markets, which are long, slow marches higher, bear markets are fast and cut deep (and are very painful). According to First Trust, “the average bear market lasted 1.4 years with an average cumulative loss of ~41%.”

I think you need to start thinking, if or when, we do enter the next bear market, whether you might be able to handle a 40%+ loss in your wealth. This is why I want you to keep paying attention to the markets and your money--because if you believe in bull markets and you buy into what is driving the market today, then you have to also believe in bear markets, and we all know what happened during the very worst of the bear markets following the Crash of 1929. That bear market lasted less than 3 years, but it wiped out more than 80% of wealth in the US stock market. It’s a story nobody wants to remember, but it is one we should never forget. Sometimes it’s easy to get caught up in the latest and greatest financial instrument, or the buy-and-hold mentality, but you should also pay attention to price-versus intrinsic value. Nobody has ever been hurt taking profits, to my knowledge, but many an investor has gotten hurt being greedy.

The rise in cryptocurrencies ensues, as Bitcoin (XBT, GBTC) continues to hold most of its massive advance, though its conversion rate to the US dollar (UUP, UDN), has come down quite a bit from its height. The SEC is cracking down on initial coin offerings (ICO), but we won’t see the last of them. Still, speculators are growing more and more skeptical of the scarcity of cryptocurrencies, as more and more cryptocurrencies are created. Perhaps each has a limited supply, but if a new one can be created, then the scarcity argument may not hold for all, in aggregate. We’re also witnessing things that I never thought I would see again, things that are dot-com-bubble-like. For one, Long Island Iced Tea (LTEA) changed its name to Long Blockchain, blockchain being the technology behind Bitcoin and others, and saw its shares soar. Even Eastman Kodak (KODK)—yes that Eastman Kodak—is getting in on the action, announcing that it will launch a cryptocurrency called KODAKCoin “to help empower photographers and agencies to take greater control in image rights management.” Shares surged on that news, too!

We think the most important developments, however, are happening with respect to interest rates (TLT, TBT). Near term yields are reaching the highest they been in years, and the 2-year Treasury (DTUL, DTUS) has now passed the average dividend yield on the S&P 500, perhaps creating a conundrum for some portfolio managers that had been holding a passive index, in part for a yield portion, as now such portfolio managers can get an equivalent yield on a riskless Treasury instrument of rather small duration. We have been saying for some time that the tipping point will rest on when the market wakes up to a higher-yield environment, and while we may be a few percentage points away in the 10-year Treasury for that, yields are slowing inching higher, some of course more abruptly than others. This is partly why we are witnessing the sell-off in utilities (XLU) and REITs (VNQ), both equities’ prices highly sensitive to risk-free yields, regardless of underlying constituent fundamentals. Midstream energy equities (AMLP), though not directly tied to energy prices, only indirectly, have held up a little better thanks to rising crude oil prices (USO, OIL), which help the credit quality of their customers.

We think the rise in near-term risk-free yields, the weakening US dollar relative to the euro (FXE, EUO), and the recent advance in gold (GLD) prices are all in some part tied to US corporate tax reform. Our initial opinion of the tax bill is that the US will have a very difficult time paying for the capital expensing provision of the new bill, “which allows companies to deduct their investments in tangible assets in the year of the investment,” let alone the cut in the corporate tax rate to the low-20s (21% from 35%), too. The reality is that while the corporate tax cut will help stimulate new investment and pave the way for higher wages, it also has the ancillary dynamic of potentially driving sovereign yields higher, as we are witnessing, and driving inflation, as in what we have also seen with respect to higher wages and one-off bonuses. Waste Management (WM) issued tax-related bonuses, for example, and Walmart (WMT) did the same, but the latter’s announcement was followed shortly by the layoff of 1,000+ corporate workers.

The long-term implications of the tax cuts have yet to be completely ironed out yet, in our view, but if government tax receipts fall to the point where yields on US Treasury instruments soar, an occurrence that may be accompanied by outsize inflation, an increased discount rate could have a more-than-offsetting impact on company valuations, across the board. Though it may be hard to believe that the corporate tax reform could potentially be a negative in the long run, given that it will drive accounting earnings per share higher in the near term, the largest component of value for an organization originates in its long-duration enterprise free cash flows, which are very sensitive to discount rates that tie future value to today. Said differently, it matters more what the 10-year yield ends up being in the event of a higher cost of borrowing for the US, for example, than the delta in earnings per share for next year or 2020, even if that delta may be meaningful and exciting. No change happens in a vacuum, and that’s the case for political events in the form of tax cuts, too.

All things considered, however, the US economy is performing wonderfully. GDP continues to advance at a nice clip, unemployment is super low, and consumer sentiment is at or near highs. Innovation at Silicon Valley continues unabated, the energy (XLE) ecosystem is recovering, and companies like Netflix (NFLX) and Tesla (TSLA) remain of great interest. Newly-minted millionaires in Silicon Valley and in the Bitcoin community may be in part driving the broader stock market higher, too, and some are saying that the demographic make-up of millennials (MILN) could make the next 20 years in the stock market the best 20 years yet. That is going to largely depend on continuous innovation, and while we had Microsoft (MSFT) in the 1990s (Windows 95), Apple (AAPL) in the 2000s (iPod), Facebook (FB) and Twitter (TWTR) in 2010s (social media), only time will unveil that next-generation breakthrough in the 2020s. How about a cure for cancer? Wouldn’t that be nice? We’re monitoring the oncology divisions of big pharma very closely these days.

As we wrap up, there is one change that I have been mentioning for months now, but as of this edition, it is finally incorporated into the Best Ideas Newsletter. I think it moves us in the right direction of giving our customers what they want. What we've found from member feedback is that many are having varying experiences with the newsletters. For example, many of our members were not aware that Visa (V) and Apple, two of the best performers in the Dow Jones Industrial Average during 2017, were among our favorite ideas last year, as they were the "highest-weighted" ideas in the simulated Best Ideas Newsletter portfolio--so calculations regarding the ideas in simulated portfolio fashion were less relevant for a great majority of our members, and in some ways, our excitement surrounding the success of ideas wasn't as well-received as we would have liked.

As a result, and as we have been saying for a couple months now, we think a list-versus-weighting format may work the best, as it gets our favorite ideas at the top, and helps to explain how we think about the ideas themselves, that we may like one idea more than the next one, etc. This is now reflected in this January edition of the Best Ideas Newsletter. It also offers more flexibility with respect to providing a range of weightings, giving us more time for analytical work as opposed to doing the monthly calculations. We continue to measure our ideas and methodologies, of course, as we view this as par for the course, and we think the Valuentum Buying Index rating, the fair value estimates and ranges, the Dividend Cushion ratios are worth the membership price alone, let alone the newsletters that we provide. In any case, thanks for the feedback and making Valuentum the best it can be. We appreciate it greatly. Here’s to a great 2018!

<The Best Ideas Newsletter was released January 15, 2018.>

Related ETFs: SLV, IYR, MTUM, BA

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The High Yield Dividend Newsletter, Best Ideas Newsletter, Dividend Growth Newsletter, Nelson Exclusive publication, and any reports and content found on this website are for information purposes only and should not be considered a solicitation to buy or sell any security. Valuentum is not responsible for any errors or omissions or for results obtained from the use of its newsletters, reports, commentary, or publications and accepts no liability for how readers may choose to utilize the content. Valuentum is not a money manager, is not a registered investment advisor, and does not offer brokerage or investment banking services. The sources of the data used on this website and reports are believed by Valuentum to be reliable, but the data’s accuracy, completeness or interpretation cannot be guaranteed. Valuentum, its employees, independent contractors and affiliates may have long, short or derivative positions in the securities mentioned on this website. The High Yield Dividend Newsletter portfolio, Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio are not real money portfolios. Performance, including that in the Nelson Exclusive publication, is hypothetical and does not represent actual trading. Actual results may differ from simulated information, results, or performance being presented. For more information about Valuentum and the products and services it offers, please contact us at [email protected]

Momentum is one of the most powerful and persistent market anomalies. The evidence supporting this assertion is overwhelming. The idea that buying past winners and selling past losers (from 1-12 months) can lead to outperformance, though, is still bewildering to many. It’s not intuitive, especially for value investors, to believe that past performance in security prices can actually be indicative of future results.

But indeed it is. That is not to say that momentum investing is “easy” or that it “always works.” Far from it. It must be executed in a systematic fashion, with discipline and without emotion. And like value and other anomalies, momentum returns are inherently cyclical. That means there are periods of above-market performance and periods of underperformance.

Therein lies the problem for many investors when it comes to anomalies. They tend to chase performance, reducing or eliminating the benefits of the anomaly itself. The notion is particularly perplexing when it comes to momentum investing because while chasing security prices in a systematic fashion works over time, chasing the return stream from that chasing does not.

An example will make this point clearer.

An investment of $10,000 in 1980 would have grown to $1,176,223 by 2015 in Small Cap Momentum, far outpacing the $268,585 in the Russell 2000 Index (14.2% annualized vs. 9.6%). Meanwhile, a similar investment in Large Cap Momentum would have grown to $816,472 versus a gain of $504,466 in the S&P 500 (13.0% annualized vs. 11.0%).*

(*Note: there are many, many ways to define momentum. In this piece I use the AQR Momentum Index (Large-Cap and Mid-Cap U.S. Equities) and the AQR Small Cap Momentum Index (Small-Cap U.S. Equities). AQR ranks stocks based on their total return over the prior twelve months (excluding the last month) and includes the top 33% of stocks in their indices, weighted based on market cap and rebalanced quarterly. Click here for more detail.)

While momentum widely outperformed from 1980-2015, there were many periods in which momentum underperformed. In looking at rolling 1/3-year returns, Large Cap Momentum outperformed the S&P 500 62/63% of the time. This means that 37%-38% of the time it was deemed to be “not working.” Would you stick with it through such hard times, including the recent 30% underperformance from March 2009 through February 2012? Maybe, but most would not.

Momentum in Small Caps appears to have been more consistent, outperforming in roughly 75/82% of rolling 1/3-year periods. This is very high, even among anomalies, but still leaves investors with periods of underperformance.

Which brings us back to the title of the post. What if investors chased the anomaly, only investing in momentum after an outperforming year? How would their returns look?

As illustrated in the table below, all of the outperformance in Large Cap momentum and nearly all of the outperformance in Small Cap momentum disappears. (Note: this is before fees and expenses associated with a momentum strategy, after which the investor would surely be underperforming.)

The lesson here for investors: to reap the full benefits of an anomaly, you cannot chase the performance of the anomaly itself. In order to do so, you must be willing to accept the fact that there will inevitably be times when the anomaly is “not working.”

Emotionally, this is not an easy task. Which is why maintaining a diversified portfolio of asset classes with a tilt toward factors may in practice work better for many than a concentrated portfolio of value or momentum. This is probably true irrespective of whether the concentrated portfolio would have superior long-term returns.

Why? Because diversification will mitigate the negative emotional response from an underperforming year in any given factor. Which is another way of saying that the investor will be more likely to stick with value, momentum or other anomalies when they are underperforming if they are only one piece within a broader portfolio. And if we have learned nothing else from market history, sticking with a long-term investment plan is paramount to investment success.

Our own research has led us to a similar conclusion (click here to download the 2016 Dow Award winning paper on moving averages and leverage): your ability to stick to a strategy matters more than the strategy itself.

Related:

Anomalies, Cycles and Inevitable Periods of Underperformance

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

CHARLIE BILELLO, CMT

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors previously held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Momentum is a word that gets thrown around a lot. I personally like to measure momentum using a 14-period relative strength index (see here), but different people have different definitions. Fine. For today, we’ll argue that “momentum” stocks are those listed in the MSCI USA Momentum Index. Looking at these stocks as a group, I think they are going to continue to get destroyed going forward, particularly relative to the rest of the market.

First of all, forget this whole FANG thing. I don’t know who made that up or why people like to limit it to just 4 stocks. I think it’s stupid. They have nothing to do with one another and there should be others included in the list. In fact, in November I wrote a piece about how FANG stocks are this cycles Four Horseman (See here) and was further evidence at the time that made us very bearish U.S. Stocks heading into December and January. That obviously worked out very well.

Secondly, the list of “Momentum” stocks, includes more than just these 4 FANG names, hence my use of the adjective stupid. You can get more information here from iShares, but half the index basically consists of technology and consumer discretionary names: Google, Amazon, Facebook, Home Depot, Visa, Starbucks, McDonalds, etc. It’s a list of large and mid-cap stocks with relatively higher momentum characteristics. The way I see it, the last men standing in a bear market for U.S. Stocks.

Anyway, I think the main point I’m trying to make here is that these “momentum” stocks are done for, especially relative to the S&P500. Remember what happened to the Four Horseman in 2008? They all got destroyed. I would expect the destruction in this cycles’ version: FANG, as well as the rest of the momentum stocks to continue well into 2016.

Here is a chart of the iShares MSCI USA Momentum Index ETF $MTUM vs the S&P500. In other words, Momentum stocks compared with the rest of the market:

Notice how we briefly put in a new highs last month before quickly reversing. This confirmed a failed breakout as well as a bearish momentum divergence. This is a beautiful recipe for disaster and we fully expect this group of names to continue to get crushed.

This destruction can also be seen in the individual components. Amazon put in a beautiful failed breakout in late December, Google put in a beautiful failed breakout after its most recent earnings release. It certainly appears that Facebook is doing the same thing. There is an ongoing theme here that I love to see: Momentum stocks failing and breaking down. I believe this trend is here to stay and we want to be shorting momentum stocks very aggressively, particularly relative to the S&P500. I think for every dollar short $MTUM we can be long one dollar of $SPY.

There is a pretty clean uptrend line (not shown here) from the 2014 lows in this spread. I think the failed breakout over the past week in this ratio will be the catalyst to send prices tumbling and below this uptrend line. I would get the heck out of the way in this one or short it outright as long as we are below the September highs. The risk levels are very well-defined and I would not be covering any time soon. Rather, I would prefer to sell into any strength, if we get it.

I think this is a great trend. I like it

Become a Member of All Star Charts

In a recent Q&A with Patrick O’Shaughnessy, I said the following when asked about the momentum factor:

I’m a huge fan of the momentum factor, mainly for its diversification benefits. It’s also the least understood of the well-known risk factors. I’ve done a ton of work on momentum in my day job, but haven’t been too impressed with the retail products available. Most cost too much or they’re not tax efficient because it’s a higher turnover strategy.

One of the reasons I think momentum is so widely misunderstood is because not enough advocates of the strategy have explained it well enough (although maybe that’s on purpose). It’s also counter-intuitive to almost every other strategy out there, which can make investors uncomfortable if they don’t know what they’re doing.

Even if you aren’t a practicing value investor, the value anomaly is easy to explain — buy at a discount and then wait. The momentum factor is based on buy high, sell higher or alternatively, cut your losses and let your winners run. Value investing is based on a long-term reversion to the mean. Momentum investing is based on that gap in time that exists before mean reversion occurs. Value is a long game, while momentum is usually seen in the short- to intermediate-term.

Another misunderstanding comes from the fact that investors are constantly told that it’s a huge mistake to chase performance. And it is a terrible idea to chase performance if you don’t know what you’re doing or why you’re doing it. Momentum is chasing performance, but in a systematic way, with an entry and exit strategy in place. Momentum tries to take advantage of performance chasers who are making emotional decisions. This is why the best momentum investors use a rules-based approach, to avoid those emotions.

So what exactly is momentum? In short, momentum is the fact that markets tend to continue to trend in the direction they’re going much longer than most people assume is possible. Investments that have performed well tend to continue to perform well and investments that have performed poorly tend to continue to perform poorly. None other than Eugene Fama and Ken French, the fathers of the efficient market hypothesis, hadthis to say on the topic:

The premier market anomaly is momentum. Stocks with low returns over the past year tend to have low returns for the next few months, and stocks with high past returns tend to have high future returns.

Here are the long-term risk premium numbers from the Fama-French database, courtesy of Larry Swedroe and Andrew Berkin:

As with any strategy that has been proven to work historically, there are usually two explanations given — either the strategy takes more risk and is compensated for those risks or there are behavioral factors involved that allow the premium to persist. To me, the behavioral explanation always makes more sense, because really the only way for one investor to outperform is for another investor to underperform. To do better you have to be able to take advantage of someone else’s mistakes. This is the foundation that any viable long-term investment strategy rests on.

There’s a laundry list of mistakes and behavioral biases that investors exhibit that have been covered in detail here and elsewhere. Many of these emotional responses and mistakes are the very reason that momentum works. Research shows that investors hold onto losing stocks too long in hopes they will come back to their original price while selling their winners too early. Investors also anchor to recent results, so initially markets underreact to news, events or data releases. On the flip side, once things become apparent, investors herd and overreact, causing an overshoot in either direction. Fear, greed, overconfidence and the confirmation bias can lead investors to pile into winning areas of the market after they’ve risen or pile out after they’ve fallen.

All of these behavioral issues can lend a helping hand with short- to intermediate-term momentum in markets for those who are willing and able to take advantage. Basically, momentum tries to benefit from irrational market participants. This can be easier said than done as these trends don’t last forever and can have swift reversals when they do come to an end after they overshoot.

There’s a huge body of research to back this up, but you’d be hard pressed to find many average investors who actively seek out the momentum factor. Other than the fact that it’s misunderstood by most investors and counter-intuitive, momentum can also be a high turnover, high cost strategy to implement if not done the right way. As I said to Patrick, there really aren’t that many retail products available at a low cost that make sense for investors to legitimately invest in this risk factor. Momentum typically involves high turnover in holdings over short time periods, which can lead to increased costs and tax inefficiencies if used in the wrong structure. Momentum can also lead to severe drawdowns, often larger than the overall market, at the inflection points. As usual, nothing works all the time.

In my next post, I’ll explore Gary Antonacci’s book, Dual Momentum, which explains the two different types of momentum — relative and absolute. Antonacci has also devised a system that tries to minimize the flaws that are seen in most momentum investment strategies, so I’ll explore Dual Momentum in more detail to see how it works.

Further Reading: Why Value Investing Works The Style Box of the Future Fact, Fiction and Momentum Investing

My new book, A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan, is out now.

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This post from Ben Carlson (@awealthofcs) originally appeared on A Wealth of Common Sense.

One of the most difficult aspects of investing is that to create a successful investment process you have to get used to the fact that you’re bound to have competing ideologies at times depending on where we are in the investment cycle.

Take buy and hold as an example. I like to say that any type of buy and hold strategy only works if you’re able to both buy and hold when markets crash.

And while it can be difficult to follow your plan during a market crash you have to have a completely different mindset during a bull market. To practice buy and hold (or some variation of it) you really have to be a practicing contrarian when stocks are going down and a practicing trend-follower when stocks are going up. You have to be willing to use two competing schools of thought at different times. That’s not always so easy to pull off.

In many ways this is similar to the two most well-known quantitative investing strategies – value and momentum. Each of these strategies seeks to take advantage of over- and under-reactions made in the market, but in very different ways. With a value strategy, stocks that have performed poorly for one reason or another become cheap as investors over-react by selling first and asking questions later. With a momentum strategy, stocks that have done well recently tend of continue doing well for short periods of time because investors initially under-react. Value and momentum each rely on mean reversion, but in different ways and over different time frames.

Both value and momentum have historically been shown to work well as stand-alone strategies. But these two contrasting ideas actually work very well when you pair them together because they can make up for each other’s deficiencies during certain market environments. Therefore, diversifying these two return streams helps increase risk-adjusted returns.

But the implementation of a value/momentum combination will never work if the investor isn’t willing to accept that there are two schools of thought that can complement one another. (Read more on the advantages of combining value and momentum from the team at Alpha Architect.)

Really this idea of dealing with competing ideologies will be true of any successful long-term investment strategy. At certain times you will have to be willing to take an uncomfortable stance. Sometimes that means going against the crowd. Other times it’s going to mean going along with the crowd.

You have to be intellectually honest with yourself to be able to pull this off.

Lately it seems that every investor would like to be considered a contrarian that goes against the herd. It’s an intellectually stimulating position to be in. I think an actual contrarian strategy can be one in which an investor is willing to combine different approaches and consistently follow them throughout various points in the market cycle to manage risk and improve long-term performance.

Further Reading: Avoiding the Extremes Don’t Take This Personally

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This post from Ben Carlson (@awealthofcs) originally appeared on A Wealth of Common Sense.

My firm’s director of research has an important post up today with a handful of findings from a larger project we’ve been working on. Michael Batnick points out that, contrary to the hatred and suspicion surrounding the term “smart beta”, there is a ton of validity to these strategies. He took five of the most popular smart beta indexes and showed that all of them have beaten the traditional cap-weighted S&P 500 since 2007.

The catch was that you had to do the following:

1. Pick one and stick with it.

2. Ignore the fact that there were other smart beta strategies that had done much better in a given year.

3. Not hop from strategy to strategy, allocating to whatever just worked in the prior year.

I send you over now, you will learn something:

It’s Investor Behavior, Not Investment Behavior That Matters (Irrelevant Investor)

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