6 – M4 L3b 06 Winners And Losers In Momentum Investing V2

Here’s a question for you. If two stocks begin and end at the same point over a period of time, does it matter how they got there? If you ever heard the fable about the tortoise and the hare, then you might remember the saying, “slow and steady wins the race.” Maybe that idea is relevant in trading. For example, let’s pretend the return of two stocks. Let’s call them stock tortoise and stock rabbit. Over the same year are both plus 20 percent. If we created a simple momentum factor based on the one year return, this would give us the same signal for both stock tortoise and stock rabbit. What if we were to look at the trajectory of both stock tortoise and stock rabbit and notice that the path they each took to arrive at the plus 20 percent was rather different? For example, let’s say stock tortoise has a linear trajectory, where it incrementally increases throughout the year at a steady pace. Let’s say that stock rabbit increases at a higher rate, say plus 40 percent earlier in that year, but then drops by 50 percent later in the year. Even though the tortoise and the rabbit reached the same point at the end of one year, both plus 20 percent, which one might you think will do better in the next few days, weeks, or months? In this case, do you think it’s fair to hypothesize that “slow and steady wins the momentum race”?

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