Wednesday, January 22, 2014

2013 Overview

2013 is closed for the books and this had been a good year on the stock market and for me also. A while ago, I created a profile and a fund at Marketocracy.com. It is a website for running simulated mutual fund portfolios. The founders state their mission is to find and reward up and coming investment managers, whether they are professionals in the field or amateurs. You are given a hypothetical amount of money to manage according to SEC-like mutual fund rules, including management fees, positions restrictions, etc. There are other websites to run and track simulated portfolios like that and Marketocracy has its shortcomings (I find notably it is not the fastest website, and tracking of corporate events can be improved). But overall it is a great place to showcase your investment management skills and your business.

As of December 31, it showed that my flagship KMF mutual fund was up by almost 28% after fees for the year, compared with almost 32% for the S&P 500 index. However you’ll notice my fund was more or less flat from its start in October 2012 until April 2013. It was almost two-thirds in cash or in short-term bonds in the beginning of the year. That was due to a lack of investing ideas to start and I don’t like to trade on companies when their annual report is close to being due. I scarcely pay attention to quarterly reports and, since the vast majority of companies have their year-end in December, I basically sat on my hands rather than try to put that cash to work in stocks in the latter part of 2012 and in early 2013. So comparing the performance since the beginning of April, when I got around to investing most of the portfolio following the annual reports releases, to December 31, the performance of my fund was 27% after fees, compared to the 22% for the S&P 500 and 24% for the Russell 2000 index, a representative index for small companies.

It is entirely foolish to extrapolate what was basically 9 months’ worth of good performance into the future. Do I expect my outperformance to continue in 2014? While that would be nice, I shouldn’t expect that every single quarter or every year. If anything, all great investors had periods of time where they lagged the market, often for 2-3 years at a time or more. So of all people, I’m very unlikely to be different in that respect. I do, however, have the utmost confidence in my portfolio and my process, and I do think I’ll be able to outperform the market in the long term. As for the stock market in general for 2014, I can’t predict what’s going to happen. Neither can most trained analysts and managers for that matter. So I won’t jump into a fool’s game. Some people think that because the market went up so much in 2013, it must come down in 2014. There’s nothing preordained, just because it went up doesn’t necessarily mean it will come down sooner rather than later. That said, the market does seem to be trading at above average levels compared to overall profits. And I’ve found it to slightly harder these last few months to find new ideas. So maybe we will have a down year, who knows. Since I try to find well-defined undervalued situations, I don’t care much what the stock market will do. I think my portfolio is well protected on the downside and any correction will only help me find more opportunities.

So my fearless prediction for 2014? Like the old saying goes, “it will vary”.

My Marketocracy fund can be found here so you can track my performance for yourself.

Monday, June 17, 2013

The return

An admittedly long time has passed since my last update. It has been a tumultuous year for me. On the personal side, there was the birth of my first child, followed by the return of some of my stepchildren to the household under unfortunate circumstances. We now have a household of five kids. Given that I didn’t have any kids just four years ago, that has been quite the adjustment for me. Meanwhile, on the professional side, I have been on some side projects at work, while also preparing for the next level of the CFA program.

Understandably, writing has taken a back seat amongst all my activities. However that does not mean I have stopped studying, analyzing and refining my investing techniques. A big portion of my off time over the past year has been spent reading and re-reading books, research articles and ideas from all over the blogosphere. A lot of what I’ve seen has been interesting and helpful. A lot of it still has been… less useful. But the important thing has been learning something new every day, trying it out for myself and applying it. That has led me to tweak my investing criteria in different ways. The broad principles of value investing guide me as always, it is to me the most logical philosophy. For the time being I am much more comfortable relying on simple quantitative analysis, à la old school Graham or Schloss style. Investing is never a static discipline and there is always room to grow. I will elaborate in the future on my current views, methods and where I see my thoughts evolving on investing.

In the meantime, while I wasn’t writing for most of the past year, I have continued to actively manage simulated portfolios. I now have profiles on Investopedia.com (profile name: kgateau), Marketocracy.com (kgateau) and the Motley Fool at Fool.com (konradgateau). My profile on Fool.com is publicly available to see. I’ll have to see if the others can also be viewed publicly. I’ll comment on my successes and failures so far and my general portfolio compositions. For now, it is great to be back and writing.

Tuesday, January 24, 2012

Evolving thoughts: My current quantitative stock selection process

Now that the holidays are over and I have successfully passed the Level 1 of the CFA exam, I’ve gone back to one of my current investment projects. I’ve been working on developing and refining my stock selection method, specifically for non-financial companies (financial companies have distinctly unique financial statements so they won’t be covered here). Forecasting is beyond my means and, gathering from my readings on the topic from James Montier to David Dreman, probably more harmful than anything. In any case, few people can do it reliably, myself not included. In that regards, I’ve decided to focus squarely on the published financials of companies to identify and value opportunities. Like this article by Benjamin Graham points out, as well as various other observations and research from Graham again to Joseph Piotroski to Tweedy Browne Company, it is entirely possible to have objective and somewhat simple stock selection criteria based on the publicly disclosed financial statements while obtaining more than satisfactory results, provided the criteria are logical both in theory and in practice.

My goal is to identify companies that are both safe and cheap with good upside potential. The three are in general linked to each other. Bought at a cheap enough price, most companies can be a good investment opportunity with little downside. Plus, minimizing your chance of a loss is actually a precursor to achieving good returns. I’ve decided to look into four general areas of criteria: 1) financial position 2) improving fundamentals 3) valuation 4) quality. The first two areas are fairly non-controversial, though at the same time I’m sometimes surprised at how little is paid attention to them. First off, I initially screen for adequate financial position, to be more precise I look for a leverage ratio of less than about 2.5 (meaning a company has a capital structure of at least 40% equity, or conversely no more than 60% liabilities) and a current ratio (current assets to current liabilities) of about at least 1. For smaller companies, I tighten the criteria to a leverage ratio of less than 2 and a current ratio of at least 2. The next area I look at is the Piotroski F score. The F score is a convenient summary of 9 fundamental indicators. While it is a quantitative measure, there are no complicated calculations; it is instead more of a checklist of observations. To summarize the F score, it consists of the following tests:

1) If Net Income > 0, score 1
2) If Cash Flow from Operations > 0, score 1
3) If Cash Flow from Operations > Net income, score 1
4) If Return on Assets (ROA) in the current period > ROA previous period, score 1
5) If ratio of Long-term debt in the current period < ratio previous period, score 1 6) If Current Ratio current period > Current Ratio previous period, score 1
7) If number of shares outstanding in the current period < shares outstanding previous period, score 1 8) If Gross margin in the current period > Gross margin previous period, score 1
9) If Asset turnover in the current period > Asset turnover previous period, score 1

Any test that is not met gets a score of 0. The scores are added up for a maximum possible score of 9, so companies with such a rating basically have all the fundamental indicators pointing in the right direction. Some of these criteria can probably be changed as one sees fit and the F score doesn’t explicitly purport to be the be-all, end-all of fundamental summaries. Nonetheless the original observations have been proven to work very well when combined with a low valuation with the aim to avoid likely value traps.

Which leads me into my next area of selection: valuation. Not surprisingly this is probably the area where I focus the most on. In the past I would have at least taken a look at the trailing 12 month price-to-earnings (PE) ratio, or at least the PE for the most recently completed yearly period. Fairly early on in my investment practice, I had already gotten into the habit of virtually ignoring forward PE ratios. It wasn’t uncommon for me to look at stock that was supposedly trading at a seemingly “reasonable” 12 times forward earnings (that is, next year’s estimated earnings) but then I would realize, after taking a quick look at the data, that it was trading at more around 20-25 times last year’s earnings, often quite a bit more, most likely implying that the market was anticipating some bumper jump in earnings. Forward earnings are far more subjective than anything else; it depends on whatever assumptions are put into the estimation. Basically, any prediction, provided that it is optimistic enough, can yield a reasonable-looking forward PE. If a large enough amount of predictions were at least vaguely accurate, this wouldn’t be an issue but since a number of studies point out that forecasts aren’t usually accurate by even generous standards, that means the forward PE probably isn’t worth considering in most cases. One thing you can do with it though is gauge what the market seems to expect from the company and whether or not those expectations are reasonable. Another aspect to consider is that the trailing 12 months PE might be somewhat misleading for cyclical companies. For instance, in mid-2008, you could have bought shares in Posco, a Korean steelmaking company with a healthy balance sheet and decent returns, at over around $120 per share, representing about 9-10 times its 2007 earnings, which would initially look cheap. However that year mostly reflected a high point in the economic cycle. While the company remained profitable, it fell to less than $60 in late 2008 and early 2009 in the great economic crisis. To smooth out the effects of the economic cycle, Graham and Dodd proposed simply taking an average of previous years’ earnings. Taking at least 5 years average, and preferably 10 years, this should be able to encompass both boom and bust periods. Applying this to Posco would have yielded a multiplier well north of 15 times its average earnings, its highest for several years. Therefore I’ve incorporated multiyear averages of earnings into my screening.

Another idea I’ve incorporated for valuation is using Free Cash Flow instead of regular Earnings. Normally this is calculated from the financial statements as Cash Flow from Operations minus Capital Expenditures. Free Cash Flow represents the actual cash that goes to the company, as opposed to using earnings which in some ways is just an accounting figure with little indication of how much cash actually goes to the company. Free Cash Flow represents the amount left over that the company could use to, say, repurchase stock and pay dividends. Also cash flow numbers have the advantage of being less manipulatable than earnings. While thus superior to earnings as a representation of what the company has generated, Free Cash Flow, if non-adjusted, still leaves something to be desired. The capital expenditures number is basically all the capital expenditures, whether it is spent to grow the company or simply maintain its current business level. As Fairholme’s Bruce Berkowitz points out in the latest edition of Security Analysis (one book that I’m currently reading while taking copious notes), a more appropriate definition of free cash flow would be the amount of cash generated that is left over for the company to invest in growth, repurchase stock or repay shareholders. This takes away expenses needed to maintain operations at its current level. Unfortunately, this also happens to be very hard to calculate. Few companies provide detailed information on which spending is for growth and which is for business maintenance. Fortunately, as this article on the blog MagicDiligence points out, there is a way to go around that, by estimating the maintenance expenditure as the depreciation and amortization cash charges in the cash flow statement. Depreciation and amortization represent that the expensing of tangible and intangible assets over their estimated useful life. Since those assets will have to eventually be replaced it is thus entirely feasible to use depreciation and amortization as proxies for maintenance expenditures. In short, Free Cash Flow, as suggested in that article, can be estimated as Cash Flow from Operations minus Amortization & Depreciation (summarized as “Sensible Free Cash Flow” or SFCF). It can be somewhat crude but the general direction and logic is sound in my view. So putting that together with what was mentioned, my current favorite tool for putting a valuation on a company is calculating the ratio of its price compared to its multiyear average of Sensible Free Cash Flow, calculated over a period of at least 5 years, preferably 10 where available.

Finally, in the fourth major aspect of my selection, I decided to look at the quality of the company. In theory, quality companies will deliver superior investment results. As a short aside, in practice, any commitment regardless of quality can produce great results if bought at a low enough price and with enough research, but I will save this topic for another time to explore. This is partly out of convenience because this would take a whole other article, but also because if a couple of methods work well enough for you, you can probably just stick with them for the most part.

Returning to our topic, when quality has been mentioned as being identifiable through the financial numbers, it has often been interpreted that some measure of return on capital is the proxy. One measure that is seen very often is Return on Invested Capital. There are probably a few variations on the calculation but for all intents and purpose the one I am referring to is Net Operating Profit After Tax / (Short-term debt + Long-term liabilities + Equity). Basically, the Invested Capital should be the capital used to acquire the company’s income-generating assets. Starting with this calculation of ROIC, I have modified it a bit along the same lines as I explore the earnings or income issue as mentioned above. Net Operation Profit After Tax is replaced by Free Cash Flow (after depreciation and amortization) as that should better reflect the cash the company can use. I also look at the 5-year average, which should give a better indication of whether this is a quality enterprise, rather than an unusually high or low return on one specific year.

To summarize my four current stock selection criteria, I look at the financial statements for a combination of:
1) Strong financial position, measured by high current ratio and low financial leverage ratio
2) Improving fundamentals, measured by the Piotroski F score
3) Low valuation, measured by low ratio of price to average SFCF
4) Quality, defined by high average SFCF/IC

I’ve collected and processed the financial data for approximately 70 companies so far, with all the caveats that this could entail. A cursory glance at the results would seem to vindicate such a selection on strictly financial statement data. I’ll eventually be going through them more in detail but so far, they seem very robust.

Sunday, October 16, 2011

Book Review: The Little Book of Behavioral Investing, by James Montier

Given that James Montier’s The Little Book of Behavioral Investing recently topped the list of bestselling business books in Canada, according to the Globe & Mail newspaper (August 30th), now seemed like a particularly good time to provide a full review. In his latest book, Montier provides an introduction to behavioral economics. He identifies a list of common emotional pitfalls in regards to how we invest money and proposes some safeguards against most if not all of them.

Montier starts by introducing our brains’ two main decision-making systems. The X-System, having appeared first, is the more developed and corresponds to emotional decision-making. It uses mental shortcuts and is quicker to activate. The C-System has only developed in humans over the past few centuries. It corresponds to logical thinking and usually takes more time to activate. People who tend to rely more on their C-System tend to make far better investors. However there are serious limitations to it. It comes in limited supply (those who habitually use it more tend to get more usage of it) and even if you use it, you can still fall prey to a number of biases and other problems. These are:

1) Over-optimism bias
2) Self-serving bias
3) Overconfidence, especially demonstrated by experts
4) Confirmatory bias
5) Conservatism bias, in that we hang on to our views too long
6) Action bias

Montier takes a strong stance against many of today’s common investment practices. This starts with forecasting, which he compares to trying to be one step ahead of everyone. This is put in direct contrast to analysis of the facts on hand and knowing generally where you stand in a cycle or trend. He rails against our seeming addiction to collecting more information, despite this having no positive effect on the results from our decision-making (though it sure raises our confidence in our otherwise faulty decisions). A number of counters, some very practical, are put forward. For example, Montier advocates the use of pre-commitments, such as pre-entered buy and sell orders, in order to deal with our inability to predict how we will react in the future (that’s called an empathy gap). Another one is to keep an investment diary detailing the why of each decision at the time it was taken.

Montier generally takes the approach of introducing a behavioural problem and how it applies in the general population, giving an example or two, and then he presents how it manifests itself in the investor or the investment manager or both before prescribing a potential counter. Often the experiments have interesting results and implications. For instance, it is documented (and not the first or the last time I’ve seen this) that women are better investors than men. In another, he compares the confidence levels of predictions made by weathermen versus doctors and their actual accuracy.

Compared with his previous book Value Investing and other investing books, this one presents a different kind of usefulness. For one thing, it barely qualifies as an investing book as it deals strictly with psychology. There aren’t any investing nuggets so to speak or great lessons or much else of immediate, obvious practicality. What it does offer however is ways to take a hard look at ourselves and how we make decisions. Depending on your style, The Little Book of Behavioral Investing probably won’t be a book you will refer to particularly often but one you’ll go back to periodically over longer periods of time.

Thursday, July 14, 2011

Capella Education: pass or fail?

My latest investment idea, Capella Education, comes from the battered for-profit education sector. It is the parent company of Capella University, an online-only institution who’s clientele is comprised at 80% of professionals seeking graduate degrees and with an average age of 39. As per the usual cliché, the market tends to throw the baby out with the bathwater and I think this was the case here. Not to trivialize the concerns attributed to this sector for they were very real for the most part. To briefly recap, stocks in for-profit companies had increased substantially over the past few years as they became a popular alternative to traditional schools. They continued to rise during 2008 while the broad market tanked as the difficult economy gave a double incentive for people to go back to school in the form of more free time and the necessity to compete for fewer jobs. But in 2009-10, the situation reversed dramatically: as the markets roared back, education stocks as a whole were falling badly. Part of it was a much needed cooling off period after an extended growth run, as education stocks had traded at hefty valuations previously. But for the most part, it was because the industry as a whole was in turmoil.

As it turns out, the value that the sector brings was being called into question. The US Government Accountability Office released a report detailing its investigation into questionable recruitment tactics, going from misrepresenting employment prospects and financial aid eligibility to encouraging outright fraud. Also in the spotlight have been attempts by for-profits to recruit within homeless shelters. A far larger proportion of students go into default than in traditional institutions. At the same time, many former students complain that they haven’t been able to find meaningful employment in their field following graduation, if they graduate at all for in that respect also the numbers are significantly worse than in traditional colleges. This is largely reminiscent of a similar rough patch for the industry in the late 80s, when various allegations of fraud and other dubious practices led to restrictions on access to federal funding for students of these institutions. These reforms had been partly undone by the Bush administration, therefore enrollment soared and stock prices along with them in the past decade.

Now, there is scrutiny on the for-profit sector and the Department of Education had been working on changing the rules that govern whether a student that goes to these institutions can receive federal aid. Ostensibly, if a prospective student cannot get funding from attending a certain institution, then they would not be interested in that institution. This would effectively kill the business. On June 2nd, 2011, the Department of Education added a rule on "gainful employment" to the existing rules that determined eligibility to federal funds. All interested observers had been awaiting the official announcement on the gainful employment rule for a long time now, hence the uncertainty around the sector for the last while. All in all, and in spite of most of the industry’s protests to the contrary, the new criteria proved to be much weaker than previously anticipated and so for profit stocks had a nice bounce in the aftermath. But as much as the entire sector had been oversold previously, plenty of otherwise weak companies have recovered to the same extent as their stronger peers. Buying in a distressed sector is an almost universally sound way of turning up very profitable investment. However the important idea is to choose wisely within that sector, not buy blindly whatever pops up. A casual reading of news concerning the for-profit industry will turn up more or less the same names mentioned negatively and another set of names positively.

Here are the 3 main rules affecting eligibility to federal funds:
1) Gainful Employment. There are 3 subtests to this general criteria: A) At least 35% of former students are repaying their loans, or B) Estimated annual loan payment of a typical graduate must not be bigger than 30% of his or her discretionary income, or C) Estimated annual loan payment of a typical graduate must not be bigger than 12% of his or her total income. This rule won’t take effect until 2015.
2) 3-year cohort default. Modified from its prior version in 2009, this is the proportion of students in a cohort taking debt who default 3 years after leaving school. An institution can have its eligibility in jeopardy if its 3-year default rate is 25% or more for 3 consecutive years.
3) The “90/10” rule. An institution cannot derive more than 90% of its cash sales from Title IV federal funds for 2 consecutive years.

The Department of Education estimates that only 5% of all programs offered by for-profit organizations will be affected, the precise amount probably varying from one company to the next. Nevertheless, having only until 2015 to comply, the date is far enough that at least some organizations can adjust so this is not a concern for the most part. The latest numbers on 3-year cohort default rate, though available for the most part in annual reports, can also be conveniently found at the level of the industry here. Compliance with the 90/10 rule should be available in the financial statements.

In short, some companies indeed standout very much from the rest, both in the news (some mostly for not being mentioned in the news in the first place) and in the metrics. There are 3 that I was particularly looking into: Strayer, Devry and Capella. Devry’s showing in regards to the 90/10 rule was exemplary, at least for a for-profit organization (74% of revenue from federal funds according to its 2010 annual report) but I do not like that the 3-year cohort default for 2008 was 20%, not bad but far from stellar either. Strayer clocks in at 14% and Capella only 8%. Both Strayer (latest figures are of 2009) and Capella have 78% of their revenues provided by federal funds so they are far enough from the 90% threshold for it to be a concern. Overall they all have similar business risk profiles (i.e. relatively little) with Devry probably slightly less good. As a measure of financial analysis, their respective Piotroski F-scores are all excellent. However, I give preference to Capella due to its much stronger balance sheet compared the others. Its current ratio is above 5 and, at its current price, cash and equivalents represents well over a quarter of the market cap of the company. It also happens to trade at barely 10X its (adjusted) free cash flow so from a valuation perspective it is definitely very attractive. By comparison, Devry is both expensive and has quite a bit less protection on its balance sheet. Strayer is about as cheap as Capella but its leverage has been going steadily up for a number of years and it also doesn’t have much protection left in the form of a solid current ratio. Capella, at current prices of around $43-44, offers the most protection both on the balance sheet and from a valuation perspective.

Disclosure: Konrad does not own any of the securities mentioned in this article.

Tuesday, May 3, 2011

Book Review: Value Investing: Tools and Techniques for Intelligent Investment, by James Montier

Value Investing: Tools and Techniques for Intelligent Investment is at its heart a gathering of James Montier's recent online writings. For his online followers, most of the material here has been touched upon and is, for the most part, reprinted here with little modification. However there a number of new additions, most notably on the recent financial crisis. Mr. Montier, of British origin and previously from Société Générale, now plies his trade at GMO, a value investment firm with a quantitative orientation. Perhaps not surprisingly, Value Investing is a book heavy on stats and graphs from various experiments and research. Apart from those graphs demonstrating value investing results and the pitfalls of investing in general, the most interesting of the research cited in the book chronicle various human weaknesses, often at first seeming unrelated to finance, and how they contribute to our lower performance on the stock market. These include, among others, overconfidence, obsession with excessive information, and tendency to extrapolate recent trends into the future. Generally speaking, not surprisingly given that he authored three other books on the topic (Behavioural Investing: A Practitioners Guide to Applying Behavioural Finance
, The Little Book of Behavioral Investing: How not to be your own worst enemy
and Behavioural Finance: Insights into Irrational Minds and Markets
), Mr. Montier believes, and I tend to agree, that most of our investment failings are due to psychological factors.

Not that actual investment methods are faultless in all of this. Mr. Montier takes an axe to today's investment teachings revolving around the Efficient Market Hyphothesis and most of its assumptions. The first part of the book explores EMH's implications, logical incoherence and empirical results. Amongst other things, for instance, low beta stocks are shown to outperform high beta stocks, which is the exact opposite of theory. Mr. Montier also explores the shortcomings of Discounted Cash Flow models and the inability of analysts' to forecast, and others.

A few alternatives are offered throughout the book, such as the use of the "Graham-and-Dodd PE", the Piotroski score, using reverse-engineered DCF to analyze the implied assumptions behind current prices, guarding against business and financial risks, etc. In what is probably the most interesting part of the book, Mr. Montier proposes some tests to identify short candidates. While I myself have no interest in shorting, it does give a suggestion on stocks to avoid. In all most if not all cases, these involved quantitative measures. While these don't occupy the majority of the book, which clocks in at well over 300 pages, Mr. Montier goes well enough in the detail of their reasoning and results for the book to merit the "Tools and Techniques" part of the title.

The text isn't without flaws. One thing that might grate some readers is how vitriolic Mr. Montier is in pointing the weaknesses of current investment theory and practices. Not that his points aren't valid, quite the contrary, but it's hard not to get distracted by his sometimes acidic tone. Another criticism is that, while there are plenty of quantitative tools suggested, this book doesn't give any clue whatsoever how to approach the qualitative features of stocks. That said, some value investors are far more, if not exclusively, concerned with the numbers in the financial statements as opposed to doing a business analysis, and most analysis can probably be quantified, but the omission of this topic is noticeable and a huge disappointment. Perhaps the biggest criticism one can address to this book is the format. As mentioned previously, most of Value Investing consists of reprinted material from Mr Montier's online postings over the past few years, with some updates. Readers and non-readers of his blog would probably feel offended at paying for something that is free online. But I think this is a moot point. Rehashed ot not, there's is far too much material to make revisiting Mr. Montier's online postings an easy task. If anything, having them all regrouped in one tome makes far more convenient to revisit them (for my part, I've read the book 2 times from start to finish so far, while revisiting specific sections numerous other times). That said, the format does make the text disjointed. Perhaps more time should've been spent rewriting and editing the postings so they fit each other more, rather than making it seem like an obvious copy and paste job.

Nonetheless, Mr Montier's Value Investing is certainly a highly practical book and very actionable. The most important thing to take away from this book, and a recurring theme in all of Mr. Montier's writings, is that investing is more psychological than anything else. Entertaining and with interesting implications, I highly recommend this book. I plan to come with a review of Mr. Montier's follow up, the Little Book of Behavioral Investing, some time soon.

Tuesday, February 22, 2011

What goes up...? Momentum in investing

A recent article in The Economist newspaper, entitled "Why Newton Was Wrong", explores the effect of momentum in investing. Several studies, presented in the article, have all demonstrated that picking the best performing stocks from the previous 12 months would provide market-beating results. Moreover, this momentum effect exists for other securities markets, such as commodities and currencies, and has been observed for decades.

While several other stock market "anomalies" have been observed and then disappeared due to exposure, the persistence of the momentum effect had been a mystery. Nonetheless, the Economist puts forth possible explanations. Namely, the momentum effect may represent a lag between the perception of companies and their actual results. When investors have a negative view of a business, they tend to dismiss positive news about it as a blip. Then when the good news continues, they pile into the stock. Moreover, the effect may be carried over as fund managers proceed with "window-dressing" their portfolios by buying securities that had recently gone up, thus contributing to further boost stem.

Momentum strategies have been devised over the past to exploit the effect. These strategies have grown more complex, sometimes involving trading at incredible speeds. However that has made some of those strategies vulnerable to random movements in the markets. Moreover, momentum investing, over long time periods, loses out to value investing as prices of unfavored securities are driven down to bargain territory. It is noted that momentum investing has tended to misfire horribly at times and the article muses that the strategy may be behind  the creation and maintaining of asset price bubbles. Some of this was not necessarily unknown in value investing circles. In its "What Has Worked In Investing" paper, noted value investing firm Tweedy Browne cites studies that point out how value investing outperforms momentum investing over periods longer than 12 months. Some of this had also been reprinted in "The Little Book of Value Investing" by the late Christopher Browne, former director at Tweedy Browne.