Why Do Winners Keep Winning? Understanding Momentum Part 1| The Long & The Short Ep. 51

Explore momentum investing, its origins, definitions, and two key types: relative and absolute momentum, to improve trading success.

Key Takeaways

Momentum means past winners tend to continue winning, and past losers tend to continue losing.
Relative momentum compares a stock’s performance to other stocks, while absolute momentum compares a stock’s current price to its own past price.
The term momentum gained popularity in the mid-1990s, replacing earlier terms like relative strength.
Momentum investing is a well-studied systematic strategy with academic and practical significance.
Understanding momentum types helps improve odds of stocks moving favorably after purchase.

What the video covers

Momentum investing is the concept that stocks or markets that have been winning tend to keep winning, and those losing tend to keep losing.
The term 'momentum' evolved from earlier concepts like 'relative strength,' with contributions from technical analysts, academics, and stock rankers.
Wells Wilder introduced a mechanical definition of momentum in 1978 based on price differences over days.
Academic research by Jagadesh and Titman (1993) called the strategy 'relative strength' rather than momentum.
Value Line used a price momentum factor years before academic papers popularized the term.
Two main types of momentum are explained: relative momentum (performance vs. peers) and absolute momentum (performance vs. own past).
Relative momentum is widely accepted in academic finance and Carhart’s four-factor model.
Absolute momentum, also called time series momentum, was popularized outside academia by Gary Antonacci.
Relative and absolute momentum can conflict, such as in bear markets where a stock may outperform peers but still decline in absolute terms.
The video sets the stage for a series exploring momentum, its factor explanation, and practical implications for traders and investors.

Chapters

What is momentum investing?

Momentum investing is the strategy based on the idea that stocks or markets that have been performing well tend to continue performing well, while those performing poorly tend to continue underperforming.

What is the difference between relative and absolute momentum?

Relative momentum compares a stock's performance against its peers, while absolute momentum compares a stock's current price to its own past price, independent of other stocks.

Who popularized the term momentum in investing?

The term momentum became popular in the mid-1990s, influenced by academic papers such as Carhart's 1997 work and industry usage by companies like Value Line, replacing earlier terms like relative strength.

Full Transcript — Download SRT & Markdown

Speaker A

You see, whether you are a trader or an investor, it doesn't really matter. You want one thing to happen for sure. You want your stock to move in your favor the moment you buy it. Isn't that all we ask for? But that's not what usually happens, right? I'm sure many times a stock's going up, but the moment you buy it, it seems to somehow know and it starts tanking. And that's what today's episode is all about. How do we look at stocks, indexes, and the market itself and actually improve the odds that they keep moving in our direction even after we buy them? Welcome to the Long and the Short Show, a show where you can expect an honest take on trading, something you won't hear elsewhere. I'm your host, Sundep Prao. Today, we are starting a series on one of the most studied areas of systematic investing, and that's momentum. We'll get into what momentum actually is, why it's called a factor, where the idea actually comes from, and the two fundamentally different ways to look at momentum. So, without further ado, let's get started.

Speaker A

Before I start, here's a quick disclaimer. The examples and ideas shared in this episode are strictly for educational and illustrative purposes only. Nothing discussed here should be construed as a recommendation, investment advice, or a solicitation to trade. Trading in stocks and derivatives involves significant risk and can result in complete loss of capital. The examples and data presented are meant to explain market behavior and not to suggest that similar outcomes will occur in the future.

Speaker A

As I always do, let's start with the word itself. In 1978, a mechanical engineer turned trader named Wells Wilder published a book called New Concepts in Technical Trading Systems. It's the same book that gave the world the RSI indicator. Section five of that book is titled the momentum concept. And Wilder's own definition of momentum at that time was quite narrow and mechanical. He defined it in his words as the difference between today's closing price and the closing price a couple of days earlier. Positive if the price was accelerating, negative if it was decelerating. Price change, that's it. And that's what it meant for a long time. But here's the interesting part.

Speaker A

The research that actually built the momentum investing we talk about today wasn't called momentum investing either.

Speaker A

Naraman Jagadesh and Sheridan Titman's 1993 paper considered the modern foundation of momentum investing titled Returns to Buying Winners and Selling Losers calls the strategy relative strength and not momentum. Yes, it's the same paper we spoke about in the key research papers part two episode. Also, they weren't the first to use that term either. They themselves cite a 1967 paper by Robert Levy literally titled Relative Strength as a Criterion for Investment Selection as an earlier academic attempt at the same idea. But

Speaker A

as I dug deeper I noticed that buried in the footnote of the Jagdish Titman paper is a reference to Value Line, a stock ranking and investment research service company. Value Line was already computing something they called a price momentum factor for their rankings. It was years before this paper was published and they divided a stock's recent 10-week average price by its 52-week average price to arrive at a ranking. So, the word momentum was already circulating in the industry. It

Speaker A

meant something closer to what it means today. Even while the academics writing the defining paper on the subject were calling it something else entirely. So, this is the short story. Three different communities. Technical analysts on one side, professional investment researchers and stock rankers and academics on the other side. They all were using the same word, some avoiding the word, but all of them were trying to describe something similar. Somewhere around the mid to late '90s, the word

Speaker A

momentum started to win. And there are two competing explanations as to why. And I found them in two different books.

Speaker A

The first comes from a book called Quantitative Momentum by Wesley Gray and Jack Bogle. Their theory is that the shift happened because of a paper titled On Persistence in Mutual Fund Performance published in 1997 by a researcher named Mark Carhart. Carhart built directly on top of Jagdish and Titman's work and in his paper he kept calling the effect the momentum factor. The second story is a bit more spicy. It comes from Gary Antonacci's book Dual Momentum Investing.

Speaker A

Antonacci says Robert Levy's methodology got criticized by some other academics and in serious circles his name never quite recovered. Antonacci's argument is that when his research came back in fashion in the '90s, academics didn't want it attached to Levy. So the term relative strength was replaced by momentum. Trust academia to do such things. So I can't tell you which of this version is true. Maybe both are a little but one thing is true for sure.

Speaker A

Relative strength came first through Levy's paper. Momentum came later but it caught on well. There's another bit which I am deliberately excluding and that's the explanation of momentum as a factor which perhaps needs an episode for itself. I'm sure you may ask all

Speaker A

that is history but what does momentum actually mean today? Momentum is a very simple idea that a stock or a sector or even the whole market, whatever's already been winning, tends to keep winning for a while and whatever's

Speaker A

been losing tends to keep losing. That's it. That's the entire premise. Everything else is a refinement on top of it.

Speaker A

Now moving further, let's again recall how we define momentum. The idea that a stock or a sector or even the whole market, whatever already has been winning, tends to keep winning for a while and whatever has been losing tends to keep

Speaker A

losing. But there's a problem when we say stock that's winning keeps winning. What does winning mean here? Winning compared to what? And that's where two types of momentum come into play. Let's start with the first one which is called

Speaker A

relative momentum. Relative momentum measures if a stock is doing better than other stocks. You take a basket, say all Nifty 500 stocks, rank them by returns, and the ones at the top have positive relative momentum. It doesn't matter if

Speaker A

the market itself is up or down. In fact, a stock can be falling and still have a positive relative momentum as long as it's falling less than everything else around it. All that you're doing is you're comparing a

Speaker A

stock's performance to its peers. Absolute momentum on the other hand measures a completely different thing.

Speaker A

It checks if the stock is doing better than it used to in its past. Here you're not comparing with other stocks. You are comparing stock's current price with its own past price. For example, if it's up over say the last 12 months, it has

Speaker A

positive absolute momentum. If it's down, the absolute momentum is negative. The rest of the market or other stocks don't enter the picture. The idea is to win against yourself. And these two approaches can sometimes be at odds. A

Speaker A

stock can have a positive relative momentum and a negative absolute momentum at the same time. Picture a bear market where everything's down 30% but one stock is only down 10%. Relative to its peers, it's a winner. But compared to its own price from 6 months

Speaker A

ago, it's still a loser. Now, it's worth pausing on this before we go any further. When people talk about momentum investing or when academics talk about momentum as a factor, the kind that shows up in Carhart's four-factor model,

Speaker A

they are almost always talking about relative momentum. That's the one that has made it into the mainstream of academic finance. Absolute momentum actually comes from outside of academia.

Speaker A

It was a term proposed by Gary Antonacci, the same author I mentioned earlier. The researchers who actually discovered the effect called it time series momentum. And Antonacci didn't like that name and he had his own reasons for

Speaker A

preferring absolute momentum instead. Reasons we'll get into when we actually unpack.

Speaker A

Now moving further, let's again recall how we define momentum. The idea that a stock or a sector or even the whole market whatever already has been winning tends to keep winning for a while and whatever has been losing tends to keep

Speaker A

losing. But there's a problem when we say stock that's winning keeps winning. What does winning mean here? Winning compared to what? And that's where two types of momentum come into play. Let's start with the first one which is called

Speaker A

relative momentum. Relative momentum measures if a stock is doing better than other stocks. You take a basket, say all Nifty 500 stocks, rank them by returns, and the ones at the top have positive relative momentum. It doesn't matter if

Speaker A

the market itself is up or down. In fact, a stock can be falling and still have a positive relative momentum as long as it's falling less than everything else around it. All that you're doing is you're comparing a

Speaker A

stock's performance to its peers. Absolute momentum on the other hand measures a completely different thing.

Speaker A

It checks if the stock is doing better than it used to in its past. Here you're not comparing with other stocks. You are comparing stock's current price with its own past price. For example, if it's up over say the last 12 months, it has

Speaker A

positive absolute momentum. If it's down, the absolute momentum is negative. The rest of the market or other stocks don't enter the picture. The idea is to win against yourself. And these two approaches can sometimes be at odds. A

Speaker A

stock can have a positive relative momentum and a negative absolute momentum at the same time. Picture a bare market where everything's down 30% but one stock is only down 10%. Relative to its peers, it's a winner. But compared to its own price from 6 months

Speaker A

ago, it's still a loser. Now, it's worth pausing on this before we go any further. When people talk about momentum investing or when academics talk about momentum as a factor, the kind that shows up in Karart's four factor model,

Speaker A

they are almost always talking about relative momentum. That's the one that has made it into the mainstream of academic finance. Absolute momentum actually comes from outside of academia.

Speaker A

It was a term proposed by Gary Antoni, the same author I mentioned earlier. The researchers who actually discovered the effect called it the time series momentum. And Tonachi didn't like that name and he had his own reasons for

Speaker A

preferring absolute momentum instead. Reasons we'll get into when we actually unpack the concept. Now that we have some sense of these two types of momentum portfolios, let's double click on the idea of a relative momentum portfolio. And yes, we will

Speaker A

talk about a long only momentum portfolio as that's the more common one here in India. Now through an example, I'll help you understand how to build a very basic momentum portfolio and how people actually go about it. And here

Speaker A

are a few things we need to understand before we go about building one. The first is the concept of a universe. The very first decision you make before you even look at anything else is which stocks are you going to compare? This is

Speaker A

the universe. Let's say if you choose Nifty 500 as your universe, then you are going to rank only those stocks which exist in that universe. And if your universe is the entire listed market, thousands of stocks, you are letting in

Speaker A

a lot more noise along with a lot more opportunity. The universe you choose in a way decides what kind of momentum you are trying to capture. A narrower large cap heavy universe gives you steadier, more liquid winners. A broader universe

Speaker A

that includes small and micro caps gives you sharper more dramatic momentum. But deciding on the universe is just the first step. Let's say in our example we have chosen Nifty 500.

Speaker A

The next concept is that of filters. A filter is just that a way to screen the stocks within a universe. Remember I said screen and not rank. Here are a few filters people add and each one serves a

Speaker A

very specific purpose. a minimum liquidity filter, usually a minimum threshold for the average daily traded value over a few months because a stock can have brilliant momentum on paper and be completely useless to you if you can't build a real position without

Speaker A

moving the price. Sometimes you may also have a minimum price filter to screen out stocks trading in single digits or sometimes the other extreme that is stocks trading in lacks and a volatility filter excluding names so wild that any

Speaker A

momentum signal in them is closer to noise than signal. Then comes trading history. A stock needs enough trading history to even be ranked. If you're using a 12 month look back, a stock that got listed just 4 months ago cannot be

Speaker A

included. Stocks placed under ASM or GSM, the exchanges surveillance measures for unusual volatility or suspected manipulation are usually excluded outright. Then you may want to exclude stocks that are more prone to hitting circuits. All these become a form of

Speaker A

baseline screens. Once we have the screens in place, then we need to rank the stocks that come through those screens. In other words, how do we decide the top performing stocks? The simplest way and the one most academic research uses is just raw

Speaker A

return over some look back period. 6 months, 12 months, whatever you want to choose. Rank all stocks by their raw returns and take the top 20 or 30. But you see, raw returns has its issues. Two stocks can post the exact same 12-month

Speaker A

return, one through a slow, steady climb and the other through two or three violent spikes. and raw return would treat both of them identically. To solve for that, a second approach is to use risk adjusted return or sharp where you

Speaker A

divide the stocks written by the stock's volatility over the same period. This penalizes the choppier stock and rewards the steadier one. A third ranking method with real academic backing is the proximity to 52- week high. ranking not by how much a stock has gone up but how

Speaker A

close its current price is to its highest point in the past year. Closer the better. Now these are some of the common ways to rank stocks once we have chosen the universe and screen them that is and yes the number of stocks in your

Speaker A

portfolio 20 or 30 is an important aspect of the design. Too concentrated means too volatile and risky. One stock blowing up will leave a significant effect on the portfolio. too spread out means it's as good as buying the index.

Speaker A

You have to find a sweet spot there. And that brings us to the concept of rebalancing. Once you've built a portfolio, you are not done yet. That's just the beginning. You see, momentum isn't something you set up once and walk

Speaker A

away from. It has to be regularly rebalanced. And rebalancing means going back re-ranking the entire universe and checking if the stocks you are holding are still winners. If a stock has fallen out of the top of the rankings, it gets

Speaker A

exited or sold. If a new name has climbed into the rankings, it gets bought and included. All this while keeping the total number of stocks constant. How often you do this rebalancing is again an important decision. You could rebalance weekly,

Speaker A

monthly, or quarterly. And each one comes with its own trade-offs. Rebalance too often and your portfolio stays extremely current with what's actually working right now. But you pay for that every time in brokerage and slippage and impact cost. And in India, there's a tax

Speaker A

angle too. Sell before a year is up and you're paying short-term capital gains at 20%. High turnover may actually eat directly into whatever edge momentum is giving you. rebalance less often and you save on all that cost, but you're

Speaker A

holding on to yesterday's winners even when their momentum has actually started to fade. So yes, there's no universally correct answer here. It's a genuine trade-off between staying responsive and staying costefficient and what you choose should eventually be based on the

Speaker A

risk and the draw down numbers you are comfortable with. Now, everything I've walked you through here, the filters, the ranking methods, the rebalancing trade-offs, think of it as a basic version. There's a lot more refinement possible on top of all this. But my goal

Speaker A

today was to keep it simple and build the foundation before we add any more complexity.

Speaker A

I'm sure now you may want to know if there are any tools available to rank stocks and perhaps back test momentum portfolios. Well, there are a few third-party tools out there that let you both back test a momentum strategy and

Speaker A

run it live. Generating fresh buy and sell signals week on week or month on month as the rankings change. I'm not going to recommend a specific one here.

Speaker A

What works best genuinely depends on your own workflow. The universe you want to test and the filters you want to choose. My suggestion would be to try a few, see how each one works with the filters and the rebalancing choices we

Speaker A

just talked about and pick whichever one actually fits how you want to run the portfolio. So yes, we covered some ground today. We started with what momentum means, its different types, and we also walked through how to build a

Speaker A

momentum portfolio all by yourself, which includes choosing the universe, filters, ranking methods, and rebalance frequency. As I said earlier, there's a lot left on the table. Also, we haven't touched on absolute momentum in any real depth, and that's coming soon. For now,

Speaker A

if there's one thing worth remembering, it's this. Momentum isn't a single universal strategy. It's a set of decisions. From the universe you pick, the filters you add, the way you rank stocks, how often you rebalance, all of it affects the end outcome. I would say

Speaker A

get curious about those decisions and how it eventually affects the returns and costs. That's where the edge lies.

Speaker A

And that brings me to the end of this episode on momentum investing and I hope you found this episode useful. We will build on this in the subsequent part. As always, if you have any questions, feel free to drop them in the comments. I'll

Speaker A

be happy to respond. Till then, take care and trade safe. I'll be back soon with the next one.

Topics:momentum investingrelative momentumabsolute momentumstock tradingsystematic investingtechnical analysisinvestment researchCarhart four-factor modelGary AntonacciValue Line

Get More with the SozAI App

Transcribe recordings, audio files, and YouTube videos — with AI summaries, speaker detection, and unlimited transcriptions.

App Store Google Play

Or transcribe another YouTube video here →

Free tools: TXT to SRT · SRT Validator · Merge SRT · Subtitle to Text · All tools