Bailout

Momentum sans hindsight

By Felix Salmon

Here’s a great way of making money in the market. At the end of every month, look to see whether stocks went up or whether they went down. If they went up, then buy stocks at the average price for the month. And if they went down, then sell stocks at the average price for the month. Follow that strategy for 130 years, and you can turn $1 into $50,000!

Of course, it’s impossible to go back in time, armed with your 20-20 hindsight, and buy stocks in retrospect. So the strategy is not exactly a very useful one. But it turns out that it’s exactly the strategy that Andrew Haldane used in his value vs momentum chart.

Michael Stokes has run the numbers, and shows what Haldane’s momentum strategy would look like if you buy and sell at month-end prices, rather than retrospectively at the average price for the month:

Given that the momentum strategy wasn’t very good at outperforming a simple buy-and-hold strategy in the first place, this latest insight I think does a great job of burying it completely.

Full post as published by Macroprudential on September 20, 2010 (boomark / email).