Dollars and Jens
Tuesday, August 28, 2012
Value and Momentum

If you know academic finance (especially asset pricing), you've heard of the value effect and the momentum effect. If you haven't, the "value effect" is the fact that, over time, "value" stocks outperform "growth" stocks. The distinction between the two is most often determined* by sorting on the ratio between the accounting value of a company (as indicated on its balance sheet) and its value in the stock market. A firm with a stock market value that is many times the accounting value of its equity is a "growth" firm, while a firm with a market value close to or below its accounting value is a "value" firm.

The "momentum effect" is the finding that stocks that have performed well over the past year (especially - oddly - the early part of the last year), which are stylized "winners" generally perform better over the next month than stocks that performed poorly ("losers").

I just found - I'm likely not the first, though I haven't seen this elsewhere - that if you sort stocks simultaneously on value and momentum, the value effect comes from the "loser" stocks and the momentum effect from the "growth" stocks. In other words, loser-growth stocks subsequently underperform loser-value stocks, winner-growth stocks, and loser-growths stocks, which are all fairly comparable (though the momentum effect does seem to exist in all five of my value/growth portfolios - it's just much weaker toward the value end of the spectrum).

I haven't figured out what this means, but this seemed like a good place to share it.

* Other stock price ratios, like price-to-earnings or price-to-sales, give similar results.

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