Included in last week’s thoughtful paper by Andrew Haldane, the Bank of England’s executive director of financial stability, was this chart:
The chart purports to show the advantage of a momentum investment strategy against a value strategy with a one-month holding period, which actually loses money over that stretch of time.
AtFelix Salmon’s request, EconomPic Data has decided to play around with the assumptions a bit, testing the same momentum strategy against a straightforward buy-and-hold strategy. What he found was that although the momentum strategy still outperformed hugely over the 140-year series, the picture changes when you look at the numbers only since 1940.
The “total return” investor has outperformed throughout most of this period.
So what’s going on here? On the hand, this would seem to be a case of cherry-picking the numbers — skipping a catastrophe like the Great Depression will do wonders for a buy-and-hold investor.
But this finding also reminds us of another chart posted not long ago by James Hamilton, showing average inflation over roughly the same time period:
Other than a sharp inflationary spike during World War I, Hamilton notes, the period before 1940 was mostly characterized by deflation or price stability. The rising prices since 1940 are one of the reasons that from then until now, bond yields had pulled away from stock dividend yields.
Numerous other factors are involved, of course, but this goes part of the way towards explaining why buy-and-hold was able to keep pace with momentum throughout most of that time — and even outperform slightly overall.
We don’t advocate one strategy over another, but we’ll close by mentioning that gloom scenarios notwithstanding, it does seem extremely unlikely that the US will again experience such an extended deflationary period.
That’s not much comfort to buy-and-hold investors who are sweating through the current period of heightened uncertainty. But Haldane was counseling patience, was he not?
Related links:
The Power of Momentum – Econompic Data
An impatient market is not a happy market – FT Alphaville
Long-term perspective on the stock market – Econbrowser