Anthony Saffer VP / Financial Advisor CFP®, CKA®,

Alex Okugawa  / Financial Advisor CFP®, CKA®, CEPA® 

Jack Vogel  / PhD – Alpha Architect 

Alex Okugawa  00:00

Momentum investing at its core is buying winners. Today we’re talking with Dr. Jack Vogel, PhD of Alpha Architect on why momentum investing can be an excellent component to long-term investment success.

If you’re interested in taking your investment game to the next level, or simply understanding this philosophy better, stay tuned.

 

Alex Okugawa  00:30

Alright, Jack well, thank you so much for joining us today. We really appreciate it. We’re gonna dive right into it. What is momentum investing?

 

Jack Vogel  00:40

Thanks for having me on. Momentum investing, simply put, is an attempt to buy the winning stocks in the market.

So you’re going to examine every time you rebalance your portfolio, try to find the stocks that have done the best and you’re going to simply rebalance and buy those stocks that have done well over the past year.

 

Anthony Saffer  00:59

Jack, when does momentum investing tend to work best?

 

Jack Vogel  01:04

So momentum investing tends to work best, I would say in two types of scenarios. So one is if you have like an intermediate-term space, where the market just tends just go kind of straight up.

So we look at like 2020, right? After the pandemic hit when the market rebounded, momentum investing did pretty well, because everything just went kind of up.

So you were invested. Now, over longer time cycles, like three to four or five years, momentum will do well, if there are these longer instances where one industry or certain industries will do well. So the past five years, we’ve seen, you know, in general technology, information, data type industries have done well. And not surprisingly, momentum has done well over that time period.

 

Alex Okugawa  01:52

So what market environments tend to be challenging for the momentum investing strategy?

 

Jack Vogel  02:00

Yes, so momentum investing can have challenges in two types of environments. One is when you have a sudden reversal in industries that are leaving the market, so an instance that comes to mind would be like the internet bubble, right.

So the internet stocks led all the stocks up, led the market up, and then very quickly thereafter, actually safer stocks were leading the market, right.

So that’s one instance. A second instance is if you have over, you know, a longer time period, but you know, every month there’s a new industry-leading the market up like you have financials this month, industrials next month, that can be more challenging relative to the time, as I mentioned earlier, where you might have a few small industries that lead the market up.

 

Anthony Saffer  02:42

Jack, can you tell us a few specifics of how you specifically manage the momentum strategy for optimal performance?

 

Jack Vogel  02:50

Yeah, so, you know, simply momentum investing is just buying winning stocks. But you know, there are some enhancements one can make. So I’ll mention, you know, four of them that we make. So the first is, we attempt to when we look at our momentum names, try to eliminate high momentum stocks, that happened to be very volatile.

We do this by a measure called “Frog in the pan“. But for simplicity, let’s say we’re basically trying to look for high momentum stocks that have less volatility in the marketplace.

Second, momentum is an anomaly and factor that you need to actually rebalance more frequently. So a value factor, for instance, you maybe can rebalance every year, two years.

But momentum, you do need to rebalance more often. So we rebalance ours every three months. Third, what we do is we attempt to when we rebalance our funds take advantage of certain seasonality impacts that happen in the market. And we try to rebalance our funds near the beginning of quarter ending months.

So for example, we would rebalance near the beginning of December, to take advantage of the fact that a lot of times people know the end of the year, you may not want to sell your winners at the end of the year, but you’ll definitely sell your losers, right.

So momentum will generally do it does pretty well in December. So we try to like front-run, not front-run, but take advantage of this trade and rebalance our fund then. And then last is we take a more concentrated approach relative to other funds out there. So currently, we hold 50 stocks and we equal weight our bets across them. So those four, I would say little tweaks are parts of our system that we use to try to enhance just relative to a simple momentum strategy.

 

Alex Okugawa  04:34

Awesome. That’s great Jack. Obviously, this is a very high-level overview of what momentum investing is and some of the details of what sets your momentum strategy apart. I know alpha architects have a lot of great resources in education for investors where people where can people learn more?

 

Jack Vogel  04:56

Yes, you can simply go to our website. It’s just alpha architect doc. Come on there, we have a blog that’s very active, try to post, you know, two to three new posts a week, as well as a lot of tools that investors may find interesting.

 

Alex Okugawa  05:09

That’s great. And we’ve also laid out in our investment strategy, how we utilize this specific strategy as part of our investment philosophy.

So we’ll link to that below as well. Well, thank you, Jack for being here. We really appreciate your time and your expertise.

 

Jack Vogel  05:25

Thanks for having me on.

 

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