Exhibit 1: On the way to Sappey en Chartreuse...up at last

Last Friday some Swedish friends and I hiked a 1000m ascent from which I have been recovering since. During the pain talk turned to the Finns – major rivals to Swedes when it comes to ice hockey.

Give them their due, said my friends, they are fearless - especially in youth. Which is why (went on the Swedes) Finnish teenagers, too young to worry, dominate the mad sport of ski jumping.

As I re-read the ABN Amro/London Business School study released last February on (in part) momentum I wondered if this madder than the rest 17 year old Finnish momentum man profile is one whose time has come.

The thought of that momentum work came up because of both the Finnish chatter and Bill Miller’s last quarterly letter cited in the previous post. Mr Miller made several thoughtful comments on value versus momentum. And overall there is in his commentary a slight, perhaps inadvertently left, impression that some kind of ‘fashion’ for momentum has damaged his Value Trust's performance over the last 2 year almost as much as the credit crisis.

But the ABN Amro/LBS study, long term as it is, seems to belie that conclusion. Perhaps the Legg Mason Value Trust just has had less overlap than usual with what momentum groupies - not so much a fashion group than a permanent market commando force - lately have favoured buying?

The seductiveness of momentum is its ability to capture whatever the perceived successful investment style of the moment is (including 'value') and transform it into an instant positive price trend. Is this somehow a marketing triumph promoting casino skill at the expense of business analysis?

Beyond a certain valuation point it must be; and from then on momentum following becomes akin to a religious act. Certainly it becomes self-fulfilling and prone to fantastic reversals (c/f "he lived to jump again but never with the dare he had before").

Yet momentum is obviously an important factor to consider for investors and speculators (based on a reasonable reading of the ABN Amro/LBS study). But how it might be reconciled – and whether such an outcome is even desirable - with the habits of devotees to the scrutiny of underlying businesses is tricky. Ultimately a flourishing business correlates completely with the price of the company's equity. But it can take awhile for the match to appear.

Most non-momentum equity investors therefore look for some sort of catalyst for price appreciation. Mine is free operating cash generation: few things - price momentum itself notwithstanding - attract interest like a growing cash pile. Still, in a concession to the hot breath of momentum on portfolios' collective necks, who does not look at relative price strength (for example) to round the analysis off?

I do wonder, though, if technical indicators of momentum say more about the popularity of strategy rather than its effectiveness. Or can that differentiation be made only if there is an allowance for time horizon? And even then? There is, I think, some nuance in these questions (compared to the usual technical versus fundamental analysis debates) which even pragmatists may want to mull.

Always grateful for views via email or the comments.

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2 comments

  1. Charles Butler // 5/05/2008 06:32:00 PM

    There's an adage in the racing business that advises, in the event that someone shows up in shedrow wishing to buy a horse that you own, that if he is offering more than you would buy it for - you sell. The obvious (and maybe naive) question is: Does a fundamental investor not become a momentum type if he holds beyond a similar price level? Not to give more than minimal credence to the inane notion that gravitational metaphors can be used to describe price fluctuations, one still has to wonder how much of the profitability any person's value strategy depends on them.

    Soon a blockbuster mini-series.

    CB

  2. RJH Adams // 5/05/2008 06:45:00 PM

    Thanks C.

    I think that's right on price level - but the holder could still reason that the business will catch up with the price at the next photo (depends on the price obviously).

    [On the other hand] so many adages ('let your winners run') so little cash to try them all out with.

    More importantly, I just realised our property bet runs till end 2008 and maybe the (7) points I spotted you will still get me a prize.

    Cheers,

    R

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