A recent interview with Professor Eugene Fama represents another sign that much confusion about momentum unfortunately remains. While my faith in Professor Fama is exceptionally high, this is one of the few topics where we fundamentally disagree. While debates and discussions about momentum will undoubtedly continue, in this post I’ve tried to sort out fact from fiction by bringing clarity regarding the facts and interpretations about momentum and debunk some myths along the way.
If you’re still hawking the story that the original results of Fama and French, Jegadeesh and Titman, Lakonishok, Vishny and Shleifer — and even yours truly and others — were the result of data mining, you have been completely defeated on the field of financial battle, and you must stop.
The risk parity-versus-60/40 argument has always been about strategic long term — not tactical short term — asset allocation. Here I argue that, when viewed strategically, the empirical work on risk parity, including some of our own, understates its potential advantages. Moreover, all you need is basic finance theory to see it.
First, I must issue a disclaimer. This is for wonks already immersed in the factor literature. There's lots of inside baseball, assumed terminology, etc., in this one. I explain what I’m doing along the way, but rarely from scratch. If this stuff is brand new to you and you still understand it all you are way smarter than me (you are allowed to find that to be faint praise). There’s nothing more mathematical here than a regression model but there is lots of shop talk. So, if "factor wonk" doesn't describe you, you probably have friends and a social life, so that’s nice, but this piece won't make much sense (consider it even).
The idea that corporate management should focus on maximizing shareholder value is under attack, often in hyperbolic terms, with this idea blamed for great and varied harm (e.g., underinvestment, inefficiency, inequality and the failure of people to appreciate the film Ishtar). Recently, James Montier of the esteemed, including by me, money manager Grantham, Mayo, Van Otterloo & Co., voicing the views of many, wrote a piece calling it “The World’s Dumbest Idea.” Luckily for markets and the economy, this is not the world’s dumbest idea — not close. It’s imperfect, as all things are, but it’s not even a little bit “dumb.”