Are Value Investing and Momentum Investing Robust Anomalies?
Beating a Dead Horse: Value investing and momentum investing work
At this stage in our lives we’ve essentially memorized the CRSP/Compustat database. Name an anomaly and we can probably tell you the stats on it fairly quickly.
Legitimate anomalies can usually be described via a behavioral finance lens:
- Can we identify poor psychology in the market? (Why do prices get dislocated along the way)
- Can we identify the limits to arbitrage? (Why don’t large pools of capital arbitrage the anomaly away)
There are 2 anomalies that stand out among all other anomalies: Value investing and momentum investing.
But don’t take our word for it, check out one of my favorite papers on the subject of “anomaly chasing:”
You can find the entire laundry list of the papers examined here.
The authors argue that published papers suffer from serious data-mining efforts, and therefore, we need to adjust our statistical inference metrics to account for this fact.
We 100% agree with this insight.
And after considering this “high-bar,” there are only 3 anomalies that withstand the test of time: Value, Momentum, and Durable Consumption Goods (DCG). Value and momentum we know and love, whereas, DCG, while interesting, is a questionable strategy based on our internal research. (one can get the data here)
Perhaps more interesting is the fact that 300+ “anomalies” identified in the academic literature, once adjusted for data-mining, don’t pass the gauntlet. You’ll also notice that many of these strategies are wrapped in “smart beta” wrappers in the current marketplace.
- Dividend Yield
Are you buying a backtest? Or are you buying a sustainable alpha process?***
Join thousands of other readers and subscribe to our blog.***
Please remember that past performance is not an indicator of future results. Please read our full disclaimer. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.