F Dirienzo from NV posted over 9 years ago:

I disagree strongly that adding momentum to the criteria for the Shadow Stock Portfolio will improve long term performance. For the better part of 2 decades I have been a loyal proponent and follower of the Shadow Stock Portfolio and its rules for including a stock. Now I am much dismayed and will no longer follow it. You are trading short term improvement for long term mediocrity in my opinion. It makes mathematical sense to eliminate momentum. For instance (example may be extreme to prove a point) if a $5 stock moves up to $10 and is included in the portfolio and then proceeds to $25 when it is sold, the portfolio has made 2 1/2 times its investment in the stock. If I buy the stock @$5 and sell it at $25, I have made 5 times my money. The negative is that I hold my stock longer so if it stays in the doldrums too long, I could have a smaller compounded annual return. However, a big positive is that many stock prices have "false" starts before they become overvalued. The $5 stock can move to $10, be bought, and then drop back toward $5 or lower before its ultimate rise. Either way eliminating momentum in my mind reduces risk. I want to shop in the bargain basement when I look for value, not after the seller has begun to mark up the merchandise. In my opinion you are compromising your excellent value criteria with an element that only subdues long term results. Value has under performed growth for almost a decade until this year. The average time of out performance is less than 7 years. Value is just starting to move, and you are changing (I suspect) because a number of your stocks have continued to disappoint for a long time. Review the SS performance from the beginning. It took 9 years to start to out perform the market before it began to skyrocket. Don't do this!

fitkopadg from IL posted over 9 years ago:

I agree w/ F Dirienzo's comments above. Apart from that, I am unclear how to apply this rule (should I decide to do so):How does one determine whether a particular stock's price change is above average, or in the top 50% of the stock universe? Are we talking average', as in the mean, as indicated by one expression of the rule above, or are we looking at the price change of the median stock, as seems to be indicated by another expression of the rule above? What is the 'the database' or 'stock universe' in question here? Does one need to purchase the AAII Stock Investor Pro software to apply this rule? (None of the other rules require this software.) Do you only look at stocks that were in 'the database' or 'stock universe' for the rolling 26-week period in question, leaving out stocks that entered or left 'the database' or 'stock universe' during the period? Where can I find this average or median stock price information? Is it somewhere in the AAII web site, on Yahoo Finance, or at some other publicly available source? For candidate stocks with price changes near the average/mean, this criterion could be met or not met at different times of the day. Can you provide some more specific guidance in how to apply this rule? Thanks.

Wayne Thorp from IL posted over 9 years ago:

The momentum requirement is only on the buy side. There isn't any momentum criterion for selling. By adding momentum to the items to consider when considering a stock for the portfolio, you are potentially eliminating the "false starts" and identifying deep-value, micro-cap stocks (the price-to-book value and market cap criteria still are used) that are exhibiting above-average price momentum. The requirement requires a stock to only have price momentum that is better than half of the stock universe. This has not become a momentum portfolio.

Joe G from OH posted over 9 years ago:

I find it interesting that you are adding momentum as part of the criteria and would like to hear more behind the reasoning as to why it is being added. While I might not necessarily agree on 26 weeks, I do think momentum has a place in helping to identify stocks that are "on the move" and that have greater appreciation potential. One thing I have noticed is that when you have a MACD crossover along with an RSI 50 crossover, the stock will tend to go on a longer upward run with fewer whipsaws than those that don't. Of course, I'm just a novice. Maybe it's wishful thinking or I need new glasses! When I first started to read the article, my first thought was that you were talking about RSI(14), but when I tested the recent adds from article (AVHI, BXH, and HNRG), none of them passed the 26 week above 50 test. Then I thought you might be thinking about relative strength versus the S&P 500 (S&P 500 being the average), so I tested that. Yep, they were all slightly positive, but I'm not sure that is the relative strength test you were talking about. Then I though you might be talking about SCTR relative strength, but again, none of the 3 stocks passed the test. Bottom line, I'm not sure how and where you are arriving at your data and would greatly appreciate obtaining additional information. I look forward to your response. Thanks

Patrick N from Texas posted over 9 years ago:

I agree with all of the criticisms here. You have made an important turn that will result in no benefit long term.

Wayne Thorp from IL posted over 9 years ago:

Joe G - Jim is using relative price strength of the individual stock versus that of the S&P 500 over the last 26 weeks. In order to be considered for the portfolio, the stock's 26-week relative strength must rank in the top 50% of the universe of stocks listed on U.S. exchanges. Again, this only applies to the buy side, so sells are not based on price momentum. It allows you to identify "value on the move"--deep value, micro-cap stocks that are exhibiting above-average price momentum. Wayne A. Thorp, CFA Senior Financial Analyst, AAII

Mike T from MN posted over 9 years ago:

James and Wayne, I would assume that you added the momentum filter because you found it was beneficial in backtests. Is that the case? If it is, can you share the results? And if not, what drove you to add the momentum filter? I added a similar filter to my own screens in February, because in backtesting it had a significant positive effect on all of them. Thank you.

Wayne Thorp from IL posted over 9 years ago:

@Mike T, There is a wealth of academic research that shows the benefits of momentum investing. James O'Shaughnessy has also does extensive research on the best factors for stock selection and momentum is one of them. The article "Momentum's Role as a Driver of Stock Prices" from the May 2016 AAII Journal is definitely worth the read, especially the section on combining value with momentum. Regards, Wayne A. Thorp, CFA Senior Financial Analyst, AAII

Michael from CH posted over 9 years ago:

Studies show that momentum works. However, the results are probably not as good as reported. Momentum strategies usually require a high turnover and produce high transaction costs. This reduces the real performance which can be achieved with momentum strategies. Other studies shows that it is also a good idea to buy those stocks which showed the worst performance in the last 3 or 5 years. And this strategy comes along with a very low turnover and transaction costs as the holding period is up to 5 years. See the study “Return reversal in UK shares”, Arnold and Baker

Wayne Thorp from IL posted over 9 years ago:

@Michael, The higher turnover and transaction costs stem from using momentum as a sell signal. However, the revised Shadow Stock Portfolio rules only use relative price strength on the buy side to identify deep-value micro-cap stocks with above-average price momentum. Wayne A. Thorp, CFA Senior Financial Analyst, AAII

Michael from CH posted over 9 years ago:

Overall, I think it is a good idea to include momentum. My personal trading experience is that deep value stocks with positive momentum often perform better compared to other value stocks.