Simple Momentum Strategies Versus Value-Weighted Indexing

Joel Greenblatt wrote a very good book called ” The Big Secret”. In this book he proposes that a value-weighted index is superior to other forms of indexing.

He also gives the returns of a value-weighted indexing strategy from 1990 to the first 6 months of 2010. The CAGR of that strategy was 13.9%.

I was curious to know how my momentum strategy using stocks and gold and my momentum strategy using four highly liquid asset classes performed during this time period.

The CAGRs are as follows( from 1990 to 2010):

  • Value-weighted indexing: 13.9%
  • Momentum strategy using stocks and gold-Top 2: 14.93%
  • Momentum strategy using stocks and gold- Top 3: 13.27%
  • Momentum strategy using four highly liquid asset classes: 12.15%

The CAGRs for Russel 1000 was 7.9% and for S&P 500 was 7.6% during the same time period.

Since Greenblatt has only 6 months of returns for 2010, I wanted to see the returns from 1990-2009 and here they are:

  • Value-weighted indexing: 14.4%
  • Momentum strategy using stocks and gold-Top 2: 14.59%
  • Momentum strategy using stocks and gold- Top 3: 12.77%
  • Momentum strategy using four highly liquid asset classes: 12..07%

You can see the details in this spreadsheet.

It is amazing that simple momentum strategies can almost match Greenblatt and can even outperform his strategy of value indexing. These strategies trounce the US large cap indexes.

You need to remember that the data set is small( only 21 years of data) but it is really interesting.

I think the real issue is whether one can follow this strategy in real-time especially when it underperforms for some or even many years. You need to really believe that this will work in the long-run and have faith in it. That is where most, if not all of us will fail. That is where people like Greenblatt, Buffett, Klarman and Schloss succeed. Because they have the ability to live by this statement of Buffett:

To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.” — Warren Buffett

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