Value Investing or Momentum Investing? Which is better? Or should you blend them? If you blend them, is it better to have 50% momentum, 50% value, or is it better to rank all the value stocks by momentum, or momentum stocks by value. Find out in this presentation!

1. Value vs. Momentum
Henry Crutcher
CEO, Co-Founder
Equities Lab, LLC

2. Value Investing
• Core aspects of value investing
– Long-term investment horizons
– Passive management approach
– Looking for companies that are “undervalued” based
on their financial performance.
– Originated from Benjamin Graham and David Dodd
between 1934 and 1949.
– Investment philosophy used by a few major firms
such as Berkshire Hathaway

3. Building Value
Photo of Editor

4. Checking the Results - Annual

5. Performance
• 11.96% Average annual return
– Annualized return based on Geometric Averages
• Calculated by the Nth root product of N numbers.
• 4.46% Monthly Standard deviation
– Measures an investments volatility and a key
component of calculating the Sharpe Ratio – allowing
us to compare a strategy’s performance to a
benchmark when normalized for risk.
• 0.211 Sharpe Ratio
– The Sharpe Ratio was built as a way to identify
whether the risk taken on within an investment
portfolio was worth the reward. Calculated by
(Monthly Return-Risk Free Return)/Standard Dev

6. Passive Management - Annual
• More traditional “investor” style of trading.
• Rebalance 4 or fewer times annually.
• Trading cost of 0.1% per trade
• There’s a 0.08% annual difference in returns between
the Value Screen before and after trading costs.

7. Momentum Investing
• Core aspects of Momentum investing
– Shorter term investment horizon with an active
management approach.
– Focuses on price and volume movements rather than
the underlying financial performance of a company.
– Assumes that a company’s share price will continue in
the overall trend over a specified period of time.
– Utilizes technical factors to look for signals.
– Has gain traction among newer traders who have
access to any number of tools to help them analyze
possible positions.

8. Building Momentum
• Compares the close from two trading months
ago to the close from one trading year ago
• That ratio must be ranked within the top 70%
of companies.

9. Checking the Backtest - Weekly

10. Performance
• 14.65% Average annual return
– 2.69% greater annual return over the Value Screen
• 7.02% Monthly Standard deviation
– 2.56% higher than the monthly standard deviation of
the Value Screen. Does this make it too risky?
• 0.163 Sharpe Ratio
– 0.48 Lower than the value screen.

11. Active Management - Weekly
• Actively checking and trading within a portfolio. (More than
once/quarter)
• Trading cost of 0.01% per trade.
– More Trades = More cost
• There is a 0.87% Difference in the annual return between the two
Fama French Model

12. Market Timing
• Primarily used in actively managed portfolios.
• Hundreds of technical signals have been
developed to identify turning points in a
securities price.
• Trade at the wrong time, or on the wrong
rebalance, and the entire strategy could become
deprecated.

13. Comparing - Quarterly
• Green Line: Fama French Momentum
• Blue Line: Sample Simple Value Screener
• Brown Line: S&P 500

14. The Positions
• Fama French
– 29,319 Total Positions
– 14,231 Winning Trades
– 49% Success Rate
– Biggest Win
• $MNST @ 2,327.49%
– Biggest Loss
• $EVDY @ -100%
• Sample Simple Value
– 1,481 Total Positions
– 877 Winning Positions
– 59% Success Rate
– Biggest Win
• $F @ 174.16%
– Biggest Loss
$BSC @ -87.04%

15. What if you combine the two?
• Combine the two methods through the addition of a
momentum rank between the 80th and 90th
percentile to the Sample Simple Value Screener.

16. Backtested Hybrid – Monthly
• 21.75% Annualized Return
• 8.29% Standard Deviation
– Greater than both base screeners
• Sharpe Ratio of 0.1997
• 3,711 Total Positions
• 21 Average Held Positions
• Outperforms the S&P
56.38% of the time

17. 50/50
• To simulate realistic trading portfolios, build a
strategy that holds 50% value stocks and 50%
momentum companies using the
“position_weights” operator

18. 50/50 cont.
• 10.55% Annual Performance
• 0.157 Sharpe Ratio
• 58971 Total Trades since 1997

19. Value by Momentum
• We took the Sample Simple Value screener and added an order by tab that
takes the top 10 companies sorted by Momentum and inverted Momentum.
Momentum
Inverse Momentum

20. Momentum by Value
• We took the High Momentum Fama French screener and took the top ten
results sorted by Equities Lab’s Value Score, as well as the inverse value
score.
Value
Inverse Value

21. Why?
• Fewer Positions taken on
– Fama French returns over 1,000 results to trade on. Added
parameters cut this number down, making a portfolio more
manageable.
• Higher General Quality
– Each time the parameters are tightened, the quality of companies
that are returned by a screener are increased. By looking for both
Value and Momentum, the screener will only return solid
companies that have exhibited price growth in recent months.

22. Closing Arguments
• Like everything else in the world of investments,
there is no guarantee that either strategy will
provide the returns you want to see. However,
you should invest in whichever strategy or style
that you are most comfortable in. Take this time
to learn as much as you can about the markets,
even if that means losing a bit of money here or
there.

23. Common Sense Disclaimer
• Backtest related disclaimer
– The performance numbers created with strategies and backtests use historical prices and
they do not take into consideration commissions or any other fees your brokerage account
may be subject to. They may or may not account for “trading costs or slippage”, but they
may over or under estimate these costs. Backtests highlighted in articles generally show
uncommon performance, which cannot be guaranteed in the future. No representation is
being made that any account will or is likely to achieve profits or losses similar to those
shown. In fact, there are frequently sharp differences between hypothetical performance
results and the actual results subsequently achieved by any particular trading program.
Hypothetical performance results are generally prepared with the benefit of hindsight,
which you can’t benefit from while trading. In addition, hypothetical trading does not involve
financial risk, and no hypothetical trading record can account for the impact of financial risk
in actual trading. For example, the ability to withstand losses or to adhere to a particular
trading program in spite of trading losses are material points which can also adversely
affect actual trading results. There are numerous other factors related to the markets in
general or to the implementation of any specific trading program which cannot be fully
accounted for in the preparation of hypothetical performance results and all of which can
adversely affect actual trading results.
• Strategy related disclaimers
– Markets go through regimes and fads, where strategies that worked may no longer
continue to work. This means that strategies that worked in the past may not work in the
future, even for years. In addition, there’s fierce disagreement in the investment community
about how quickly strategies cease working after being discovered, and whether these
“arbitraged” strategies will start working again. This means that your perfectly good
strategy, that is meticulously researched and validated, may fail for no apparent reason. It
may then start working just after you have given up on it. Equities Lab can’t prevent that
from happening, and is not responsible for any costs or trading losses that may happen as
a result of strategies not working as expected or projected. This is one reason we don’t