Loading summary

Transcript66 lines

[00:00]
A
Today's Animal Spirits Talk youk Book is brought to you by Nasdaq. Dorsey wright. Go to nasdaq.com nasdaqdrsseyright to learn more about their whole suite of momentum strategies, SMAs, ETFs, and more. That's nasdaq.com nasdaqdorsyright welcome to Animal Spirits,
[00:18]
B
a show about markets, life and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.
[00:46]
A
Welcome to Animal Spirits with Michael and Ben. Michael, on today's show we have John Lewis. John is a CMT Senior Portfolio Manager at Nasdaq. Dorsey Wright, one of the largest momentum trading platforms in the US I guess that there is has to be, right? So I didn't realize John told us there $15 billion, that was news to me. That's pretty big for the momentum space.
[01:06]
C
Yeah, I would say the largest.
[01:08]
A
Yeah.
[01:08]
C
And when I say, I would say, I'm sure you know there's got to be a number one, so you can fact check me there, but according to me, they're the number one.
[01:14]
A
Yeah. So we've talked about this in the past. Why there's value is just this mammoth factor. Got to be the biggest one by I don't know what, how many times, but it's huge because value makes sense. Momentum does not. Value made sense to me immediately. Value investing index funds to me, light bulb went off immediately. I get it. I totally understand it. Momentum took me a lot longer to understand and I had to read people like Cliff Asness and Wes Gray and Meb Faber to understand this idea behind momentum investing. Like, well, why? Why would this work? It seems so simple. Like a dummy can do this, right? Or I'm gonna buy a stock that goes up. Great. It seems so simple. But then when you like put a process behind it and put some rules behind it and systematize it and say, I'm gonna have a buy discipline here and have a sell discipline here and I'm gonna take advantage of the behavior of market participants, then to me, oh, okay, now I get it. The behavioral side, that's when it clicked for me. It's behavior.
[02:11]
C
The value piece makes so much sense. As you were saying, oh, I'm gonna Buy a dollar for 70 cents. What they don't tell you is that Wall street doesn't sell dollars for 70 cents anymore.
[02:20]
A
Right? True. Yes. Yeah, yeah. It used to be 50 cents. Maybe that's inflation kicking in again. Obviously momentum is not. It's the kind of thing that doesn't work all the time. Nothing does. But I think especially, especially if you think about people in the financial advisor community, there was a huge buy in into value. Right. Think about how big DFA got and that was kind of what they were made on. Right. And I think the easiest way to explain it to advisors is if you have a value factor in your client portfolios. Momentum is the offset piece. It's the yin and yang. It's the other side of the teeter totter. They can complement one another because there are times when value works way better and other times when momentum works way better, depending on where we are in the cycle and the economic environment. And I think that's the idea to me that makes sense is like, not necessarily we're going for huge alpha, but it's. No, it's the diversification piece. That's why momentum makes sense to me. Anyway, we get into a lot more of that with John Lewis from nasdaq. Dorsey. Right. So here's our discussion with John.
[03:20]
C
John, welcome to the show.
[03:21]
D
Hey guys, thanks for having me.
[03:23]
C
So we are talking about momentum today. One of, one of, I guess in Jude Fama's words, the premier market anomaly. It's this type of thing that exists. Everybody knows it exists and yet it sounds like dumb. It sounds like it shouldn't. Like, wait a minute, you're telling me that if I buy things that are going up, like buy high and buy higher and you know, just keep doing that systematically, it actually, there's actually something there that works. And yeah, it does work, works very well. But investors seem to be very underinvested to it. At least when I'm look like thinking about ETFs, there's tens, hundreds of billions of dollars in value ETFs and shareholder yield and quality. And for some reason momentum doesn't seem to get a lot of love from investors, even though it's very well understood to have legitimacy.
[04:14]
D
Yeah, I mean, I think that's right. And, and you said it's kind of a dumb concept. And I agree, like I make a joke that I'm the dumbest person at the cocktail party if we start talking about stocks because why do you like this stock? Because it's going up and if it goes up More, I like it even more. So it is a concept that, you know, it doesn't seem like it should make sense, but it really does, and it works really well. And you're totally right that investors are really under allocated to that factor. And, and when you think about momentum in an overall portfolio context, like, it's a great diversifier to value and those other things. So, yeah, I've never understood why it's got such a bad rap and why people are so unwilling to do it.
[04:54]
A
I think part of the reason is behavioral and because the factor really is behavioral in nature. And I think the whole idea of value investing makes sense intuitively right away. I'm buying a dollar for 50 cents or whatever it is. Right. That concept makes sense. Momentum requires you to kind of take the fundamentals out of it and go, sometimes there's this hurting and there's recency bias and confirmation, all these crazy things that people do and that like, makes up momentum. So I think it's harder for people to wrap their brains around it. I certainly think, like, hey, I'm gonna buy this Stock that's up 100% in the last three months. I'm gonna buy more of it. I think it's really hard to do for people. It's hard to like, force yourself to do that. And I guess the question is, is that why it almost. For most people, it almost has to be rules based?
[05:35]
D
I mean, I think so. I think it's really, really difficult to do momentum without like a really disciplined and systematic way to do it. And that's one of the things that we really focus on a lot is, you know, the momentum factor is kind of easy.
[05:49]
A
Right.
[05:49]
D
Like you're not. It's pretty easy to rank stocks on trailing performance. Right. And why can't everyone do it? I think a lot of it comes down to the implementation kind of where the rover meets the road. That's really the unsexy part of investing. But I do believe, like, if you don't have a good process for this, it's not going to work because you are going to kind of give up on it at the wrong time. You'll get back in at the wrong time. And you just don't get many chances to get that wrong. Right. It just kind of destroys your returns over time if you don't get it right.
[06:21]
C
It seems like momentum works both ways. You want to buy stocks that are going up and you. You want to avoid stocks that are going down. I was reading research from Adam Parker at Trivariat this morning. And he was talking about what happens going into earnings and he said, quote, cheap stocks with bad momentum are not quote de risked into the print. They are anticipating the miss correctly. And the miss is a confirmation of the price action. Stocks with bad momentum that are cheap have never been punished more for missing so the market. There is wisdom and there is signal in stock prices. Even though I think a lot of traditional investors say, ah, this, the price is just what you could sell it at today, tells you nothing about its long term, tells you nothing about the value of a business. And maybe that's true over the very long term, but in the near term there is absolutely signal in stock prices.
[07:21]
D
Yeah, absolutely. And I think you're right. Like over the very long term, the fundamentals do kind of win out, right? I mean you can't, you can't survive at, at massive multiples forever. But we're looking really at the intermediate term time horizon, right? And that's really where all the alpha is for, for momentum. And you can get some pretty big dislocations away from fundamentals or things like that. And a lot of these stocks that are really good momentum names, they're not fully understood by the fundamental analyst community. And I think that's why they turn out to be like such good winners over, you know, 1, 2, 3 year time horizon type of thing.
[07:58]
A
So you mentioned earlier the fact that the momentum factor itself can also be a good diversifier because I think some people go into momentum thinking, yes, I'm going to outperform the market and historically it's shown that that factor has been very strong. But I wanted you to talk about where do the diversification benefits come from? Because I think it's interesting in the fact that a lot of people just assume, well, momentum is tech and growth and obviously it's not the same thing. Sometimes it is, but the way that I see it, it's almost like a chameleon strategy that the sectors are constantly changing and, and the types of stocks that are winning can and will change. So I just curious what you think about it from a diversification perspective.
[08:33]
D
Yeah, Ben, I think that's a good way to put it. It is kind of like a chameleon type of thing, right? I mean it will change, it will kind of go around the style box and things like that. And I think essentially when we look at momentum and let's just compare it to value, right? So we're really coming at the investment problem from two completely different angles. So momentum investing can be very, very good over time. So can Value investing. But a value investor is looking for things that have been beaten down. They want those stocks to revert to the mean and then they're out. Right. Because they're fully valued. A momentum investor is really looking at stocks that have demonstrated the ability to outperform everything else in the universe. And you buy those and you want that trend to continue. So you're really at two different parts of the cycle. And so when momentum strategies do well, very often value doesn't and vice versa. Right. So when you put these two things together, one is zigging while the other zagging, you may have two strategies that are able to outperform over say a five year time horizon, but they'll be one to two year stretches where one's working and one's not, and vice versa. It just kind of smooths out the ride over time. The excess returns are negatively correlated. And that's just a fancy way of saying, hey, look, you know, when value is doing well, momentum might not be, and vice versa.
[09:56]
C
John, you mentioned earlier the potential fundamental disconnect between the stock prices in a momentum basket and the underlying fundamentals of these companies. And sure, we saw that in 2020, late 2020, 20, 21. But more, more often than not, companies that are exhibiting momentum in their stock prices are also seeing momentum, their earnings. And the market is generally not dumb. In fact, it's the opposite. The market is pretty smart and it usually gets it right. The companies that are performing well are. Or the companies whose stock prices are performing well are generally the companies whose businesses are performing well. Can you talk more about that dynamic?
[10:33]
D
Yeah, I mean that, that's generally true. Right. The companies with good momentum characteristics often have a lot going for them on the business side of the equation, whether it's a new product, a big secular trend, something like that. It's very rare that you get these like fly by night names that really have no reason being, you know, up there. And maybe like the meme stocks or something like that. Right. Like that was kind of a different phenomenon. I wouldn't really classify those as kind of high momentum names, but those like
[11:02]
C
the bath salt version of momentum.
[11:04]
D
Yeah, exactly. The Florida man version for sure. Yeah, that was, that was kind of tough when that was happening. You know, just kind of side note, like those would sneak into your screens and things like that. And, and it was, you know, not, not, not great to see that kind of stuff getting in there. If you think about something like Apple Computer. Right. I remember when they first came out with the ipod, which I'm obviously dating myself, which is not good. I'm getting old, John.
[11:29]
C
I'm sorry. You know how I know you're dating yourself? You called it Apple Computer.
[11:32]
D
Yeah, yeah, exactly. You know, at first they came out with an ipod and I was just like, well, this is just a walkman that just has, you know, you don't put a tape in it anymore.
[11:43]
C
Right.
[11:43]
D
Well, all of a sudden, like they build this platform, that business, it's a great business. They keep iterating off of that business. That was a great momentum stock for a long time.
[11:52]
C
Right.
[11:52]
D
Another great momentum stock for a long time that nobody even thinks about was something called American Tower. Right. Like they build these cell phone towers, right. With all of this data flying around and it's not the case anymore. I'm talking about, you know, years ago, how this is one, this is just kind of an old example. But you know, that build out was a big thing. There was a ton of business momentum there. Like nobody knew that name. We had it in some of our indexes and things like that for a really long time.
[12:17]
A
So I want to talk about momentum this year a little bit. If you look at most of any momentum strategy, pick one out of a hat. This year it had an unbelievable start to the year. I think by some measures, like one of the best starts ever for the momentum factor. Right. Certain strategies are up anywhere from 30 to 40%. Really through, I don't know, the end of June or so, probably the first half of the year. It was really strong for momentum. Like you have a plenty of momentum strategies at Dorsey, Wright. I'm sure you guys had a great first six months of the year. I'm curious because I mean some of these strategies have come back in that performance couldn't have lasted forever. Right. You can't have 40%, six month returns go forever. How do you try to set the right expectations for a strategy like this that is inherently volatile? Like Michael said, momentum goes both ways, especially when things are going really well. How do you try to temper expectations when people. Because that's when people's eyes get really big and they go, oh my gosh, let's like keep putting our foot on the gas and going for more, more, more. And obviously like we said that stuff, it just can't last forever. It has to exhaust itself eventually. Yeah.
[13:19]
D
And you're absolutely right. So it can't last forever. And what you have to do is just, I think, be very open and honest about what the strategy is there to do, what the potential pitfalls are. And I Think you also have to be really upfront with people about, hey, you know, this is not something that we just want you to do for six months and kind of be in and out of it and try to time it and things like that. Like, you really do need to kind of be committed to these strategies, just like you do for a value strategy or low volatility or, or anything like that. So I, I think that's, you know, one thing we've done at Dorsey Ray, where we've been just been kind of hammering that same message for 20, 25 years. And I think, you know, that does set expectations. I think people kind of know what they're getting into. But yeah, I mean, this year has been, It'. Volatile. The volatility has definitely picked up this last month. And again, like you said, great start to the year. And then we've seen, you know, a lot of those names correct. A lot so far this month.
[14:18]
A
We get questions all the time from people who've got huge gains in stocks. Right. I bought this stock a few years ago in Nvidia or Tesla or whatever, you know, Amazon, Apple, one of these big tech stocks. And the question is always, how do I know when to sell it? Because I, I don't want to get into a situation where I see these gains evaporate or most of the gains evaporate, but I also don't want to get out of it too soon. And what if this thing just keeps going on a generational run? Like that is a qu. Like, I think it's really easy for people to buy stocks. Right. You can buy a stock because it is going up like momentum. You can buy a stock because it's down 50% and you think it's a great deal. Knowing when to sell stocks, I think, is one of the harder things. You can correct me if I'm wrong. There are no investors who are really well known for being really good at selling stocks. Right. It's just, it's a skill that not many people have. So I'm curious. I want you to talk about the sell side of momentum.
[15:06]
D
Yeah. So there are certainly no corrections that I have for you there. It is very difficult, and the selling is way more difficult than the buying. The way we look at it is what we're trying to do is keep the overall profile of the portfolio right into this kind of high momentum area. So when I look at it and when we look at it from a business standpoint, the individual names that are coming in and out are irrelevant. Right. We are really more focused on, hey, we need to keep this profile of momentum in there and we need to have this kind of overall like high momentum portfolio kind of year after year. So when we rank stocks, we might rank them like from 0 to 100.
[15:48]
A
Right.
[15:49]
D
And we have predetermined sell thresholds. So in some strategies we might sell something if it falls out of the top half of our ranks. And other strategies, maybe it's the top quartile tile of our ranks, but that's already kind of predetermined. And when it hits those thresholds, we sell it and we move on. Like we know from all of our testing that that works. I will 100% admit that with any one stock like anyone that's following that very closely or has some kind of better knowledge than I do, like you could time that better. Like we're going to make mistakes just like everybody else. But what we do know is that constantly doing this like day after day after day, that works over time. And so it is kind of messy on the sell side and we have plenty of things that turn around and we should have never sold them. But you really, that's kind of part of the real discipline and staying like unemotional about it. You just have to do what you need to do. And you know what happens tomorrow is what happens tomorrow. And if you have to buy it back, you buy it back.
[16:53]
C
So what goes into a strategy like this? How many bells and whistles are on top of. All right, I want to buy stocks that are going up, I want to weight them appropriately. What does that all, what does that process?
[17:02]
D
It's actually a lot fewer bells and whistles than you'd think. You can do it very, very simply with like a trailing twelve month price return and put the stocks into the portfolio. We do it a little bit differently. I think we have a way that we think works a little better. Dorsey Wright's also really known for point and figure charting and we do a lot of momentum there. But we kind of, we have the rules pre built. If we're doing like an active separately managed account, you know, we might have 20 to 25 names. So it's fairly concentrated. But we, we really do believe like you know, if you're going active management, you want high active share. We're not trying to mimic the index. We'll differ from it a lot. One of our indexes, you know, we might rebalance those quarterly and you know, we have a way to rank the stocks and then we, we generally weight in our indexes by factor. So the better Momentum names are going to get a higher weight in the index. So we don't, we tend not to market cap weight here. We think there's kind of like more efficient ways to do it over time.
[17:59]
C
John Hard digression. I should have led the show with this. I, I know the legend of Dorsey Wright a little bit, but I feel like they're one of the only names that I know of that has managed to turn technical analysis into like a large, well respected asset manager. And I really don't know a whole lot about how you all did that. What's the short history there?
[18:23]
D
Yeah, so the short history, I mean, Dorsey Wright was founded by Tom Dorsey and Watson Wright all the way back in 1987. And it was primarily a research shop. They started managing a small amount of money in 1994, but we really kind of accelerated that in like 2005, give or take. I started at Dorsey Wright in 2002, like right out of business school. And then we, we did a bunch of research and we kind of systematized this momentum factor. I think that was like a really big part of what we do is kind of coming to the realization that hey, if we had this systematic way of implementing this factor, we can really do it. And over the years I think we've, you know, we've had our ups and downs, but we've done pretty well. We've had different firms come to us for, you know, to work with them on different products or things like that. So now we're about 15 billion in assets under management. And that's all technically managed, right? It's really momentum factor based and we just kind of look at different universes. We can do it in emerging markets, developed markets, small cap, large cap. And so we've really grown that business and we are kind of one of the biggest pure technical asset managers out there.
[19:38]
A
I'm curious how much because you can get into really the minutia now when researching this stuff and change your endpoints. I wonder how much of a momentum strategy really is just you pick whatever timeframe you want in terms of price, right? The last six months, nine months, 12 months, three months. Whatever you use for momentum, how much of it is really just driven by that initial decision versus all the other bells and whistles that you can put on it. How much is, I guess, how much is too much in terms of making a strategy like this too complicated?
[20:07]
D
I think you can very easily make it too complicated and too over optimized. And I do think a lot of people are constantly jiggering with the strategy to kind of solve, you know, last week's problem or last year's problem for us. I think the. One of the realizations when we were putting these strategies together is like, look, we're not going to be optimal in every time horizon, but we've done a ton of research. Like, it's impossible to predict, like, what, what momentum factor is going to work best next year. Right. You just really don't know. So you have to kind of stick with something that works and just keep it rolling forward. So the separate accounts that we started up in 2005, like, those have been running since 2005. We haven't changed anything in there. We haven't changed the model. We haven't re optimized it. You know, stocks coming over the universe, but we're still running the same model today that we were back then sort of cut in.
[21:01]
A
Did you get tempted in 2008, did you ever get tempted to like, make a change at all or. I mean, because there was obviously some minimum crashes along the way.
[21:09]
D
Yeah, you get tempted a lot to do it. And I think that it also helps to have, you know, Dorsey Wright be an entire business built around this factor.
[21:17]
A
Right.
[21:17]
D
Like, I, you know, we don't just have two people sitting in a large asset management shop and everyone kind of looking over our shoulder being like, hey, you guys might need to do something. Like, we're committed to this. The whole firm is kind of built around this. And if we ever were to make a big change to one of our models or our strategies, it would probably be when we're doing well. I think the temptation is really like, oh, we're underperforming. We need to change the model. And that's kind of when it turns around and then you lose the benefit of that rebound. And I'll say, I mean, if we underperform for, I don't know, six to eight weeks, we start getting the calls right away, hey, your model's broken. And it's just, you know, kind of. It's just kind of like investor behavior. We try to talk them through it as best as we can, but we're not going to change it.
[22:08]
C
I would imagine that even though you run these strategies across various geographies and market caps, is US Large the flagship?
[22:17]
D
That's where we have the bulk of the assets. And especially on the. On the separately managed account side, again, it's a lot like when you're doing retail, separate accounts, it's like a lot easier to trade large cap US Stocks and things like that it's really tough to do like local foreign shares in a kind of a retail account. So we use ADRs. If we're doing something like that.
[22:40]
A
What do you think it looks like in terms of other, like how does mom look in terms of small caps or mid caps or even international stocks are emerging? Is it, is it really like a large cap story where there's just more hurting because these are the bigger name brand stocks? Or does momentum, is it pretty robust across all these other strategies and asset classes?
[22:58]
D
Yeah, it's generally robust across all of these different strategies and asset classes, although maybe not at the same time. So like this year, like our, our domestic momentum strategies on the SMA side are doing much better than international. And you know, there's some reasons for that, but you know, it's just like the momentum factor, at least the way we're implementing and looking at it is working better here right now in the U.S. but you know, a couple of years ago it might have been international is doing a little better. So it just kind of depends on, on the time frame. But yeah, I mean, you can use momentum for commodities. You can, we use it in fixed income. I mean, there's a number of different things you can use use with momentum. That kind of, you know, that kind of herding behavior that you talked about earlier exists in all sorts of different asset classes.
[23:43]
A
I'm curious too, because this momentum does work in the other direction and there can be some really nasty momentum sell offs too. Now, part of it is, like you said, setting expectations. How many of your strategies have a more defensive component where it'll be like a trend following or maybe there's just nothing that meets your momentum screens anymore.
[24:00]
D
Right?
[24:00]
A
You have these screens. There's no stocks that meet in because the stock market is crashing. Do you go to cash? Do you get more defensive or is it more of a relative thing?
[24:08]
D
So we do have some strategies that will go to cash, and then we also have some that are just designed to be fully invested. So, you know, certain investors want that ability to go to cash. You know, other financial advisors might not want that because that kind of messes up their overall allocation and things like that. So we do both. I think both can work. But if we're saying a fully invested type of strategy, it is more relative, like you said, Ben. So there'll always be something that pops up on the top of the screen. But at the bottom of a bear market, we might be buying a bunch of consumer staples and utilities and things like that, which Again, that's not great. When the market turns around, usually value does much better off of market bottom. And so that's kind of that zig and zag and yin and yen we're talking about. Right. Like when value might do really great off a bear market bottom, momentum tends to lag, at least like long only momentum goes up, just not as much as the market shorting moment. Momentum names, like laggard names at a market bottom is. That's really tough when you have a big bear market. That's really where the quote crashes come from.
[25:17]
C
How often do you rebalance or reconstitute these strategies?
[25:21]
D
Yeah, yeah, yeah. It depends on the strategy. So we have some active strategies that we're looking at once a week. Obviously we're not trading them once a week. So some of those strategies, like a more aggressive trading strategy might be like 125% turnover year. And then we have other ones that are like, you know, 70%. So completely reasonable for a strategy that you do need to have it adapt to the market. And a lot of our indexes, we can only rebalance those once a quarter. So like four times a year we'll rebalance the whole thing. So momentum works at those different time horizons. You do just kind of have to know how to set up the factor in order to handle those kind of different agency things when you're putting together a new product. But yeah, we have stuff that kind of rebalances at different frequencies and they all work because, you know, we've set them up to handle that sort of thing.
[26:08]
A
So markets seem like they're moving faster. Especially this, this decade just seems like it's kind of in a whole stratosphere of its own in terms of how quickly things are moving. You know, you guys said you're at $15 billion. Obviously there's buy in, but do you feel that there's more buy in or are people coming around to the momentum factor a little bit more than they would have in the past? Just because it seems like markets do have this, these quicker moves than they did in the past? Are people more receptive to the idea?
[26:33]
D
I think people are more receptive to it, at least now than when I first started at Dorsey. Right. And I don't know if that's an overall market thing or whether they've just been hearing our story for so long and they're like, oh, you know what, this actually works? And they've heard us talk about it and things like that. So I'm sure that must be part of it. At least from what I hear from different financial advisors and investors.
[27:03]
A
John, anything else that we didn't cover that you wanted to hit on?
[27:06]
D
It's been an interesting year for momentum. You know, it's really been concentrated in like the very top end of momentum, that kind of top decile. So it's been interesting. I haven't seen it like this for a while, so it's definitely been something new for the models and for me to handle as we, as we kind of go through this year.
[27:23]
A
For people who want to learn more, where do we send them?
[27:26]
D
You can go to dorseybright.com we've got our research hub out there. We've got some free research out there for you to read. If you like it, you can sign up for a free trial and get more access and things like that. So tons of information there. And then if you're a financial advisor and you're interested in like separate account or ETFs or anything like that, there's a number on that website. You can give us a call. We can tell you if we're on your platform or if you can go buy the ETFs or anything like that.
[27:50]
A
Perfect. Thanks so much, John. All right.
[27:52]
D
Thanks, guys.
[27:55]
A
Okay, thank you. You to John. Remember, to learn more about NASDAQ Dorsey wright go to nasdaq.com nasdaqdorsey Wright email us any questions, comments or concerns. Animal spirits@the compoundnews.com.

Summary8 min read

Animal Spirits Podcast: Talk Your Book – Why Momentum Investing Works

Date: August 10, 2026
Hosts: Michael Batnick and Ben Carlson
Guest: John Lewis, CMT, Senior Portfolio Manager at Nasdaq Dorsey Wright

Episode Overview

In this episode, Michael and Ben dive deep into the world of momentum investing with John Lewis from Nasdaq Dorsey Wright, one of the nation’s leading momentum trading platforms with over $15 billion under management. The trio breaks down what momentum investing is, why it persists as a market anomaly, how behavior drives its success, the benefits and pitfalls of momentum strategies, real-world implementation details, and why momentum works as a complement to value investing. The conversation offers practical insights on process discipline, portfolio diversification, and common investor mistakes—all in a lively, accessible style.

Key Discussion Points & Insights

1. Why Momentum Investing Is Both Obvious and Mysterious

Timestamps: 00:45 – 04:53

Value makes sense intuitively (“I’m buying a dollar for 70 cents”), while momentum initially feels counterintuitive (“buy what’s going up”).
Michael recounts how understanding came only after reading researchers like Cliff Asness and Meb Faber and recognizing the behavioral drivers behind momentum.
John: "I'm the dumbest person at the cocktail party... Why do you like this stock? Because it's going up and if it goes up more, I like it even more. So it is a concept that... doesn't seem like it should make sense, but it really does, and it works really well." (04:14)

2. Underappreciated and Underallocated Factor

Timestamps: 03:22 – 04:53

Momentum is the “premier market anomaly” (Fama): it’s well documented and seems “dumb,” but institutional and retail investors remain seriously underallocated—value, quality, and yield factors attract far more money.
John: "I've never understood why it's got such a bad rap and why people are so unwilling to do it." (04:53)

3. Behavioral Challenges & The Need for Rules-Based Strategies

Timestamps: 04:53 – 06:20

Momentum works best when implemented systematically—behavioral biases make it nearly impossible to do manually.
Michael: “Momentum requires you to kind of take the fundamentals out of it and go, sometimes there’s this herding and recency bias... I certainly think, like, hey, I’m going to buy this stock that’s up 100% in the last three months... that’s really hard for people.” (04:53)
John: “If you don't have a good process for this, it's not going to work because you are going to ... give up on it at the wrong time.” (05:48)

4. Momentum as Diversifier and Chameleon

Timestamps: 06:20 – 08:32

Momentum complements value in a portfolio—when one zigs, the other zags, smoothing out returns.
Sectors and styles in a momentum portfolio shift over time; it's not always tech/growth.
John: "A value investor is looking for things that have been beaten down ... a momentum investor is really looking at stocks that have demonstrated the ability to outperform everything else... You're really at two different parts of the cycle." (08:32)

5. Momentum and Fundamentals

Timestamps: 09:55 – 11:43

While momentum sometimes disconnects from fundamentals, over the intermediate term, winners frequently have strong business performance (earnings, trends, new products).
Market tends to “anticipate” reversals, especially around earnings.
John: "The companies with good momentum characteristics often have a lot going for them on the business side of the equation, whether it's a new product, a big secular trend..." (10:33)
Fun moment as John refers to “Apple Computer” and jokes about “dating himself” (11:28).

6. Recent Performance & Setting Expectations

Timestamps: 12:17 – 14:17

2026 saw a huge start for momentum strategies, with some strategies up 30–40% in the first half of the year, followed by a correction.
John stresses communication: Investors should not expect consistent outperformance or try to time momentum. Discipline and long-term commitment are critical.
John: "We're just trying to hammer that same message for 20, 25 years... you really do need to kind of be committed to these strategies, just like you do for a value strategy..." (13:18)

7. The Art—and Difficulty—of Selling

Timestamps: 14:17 – 16:52

Selling is far harder than buying; few investors are known for great sales discipline.
Dorsey Wright uses predetermined thresholds/rankings (e.g. sell if it falls outside the top half/quartile) to stay unemotional and systematic.
John: “The individual names... coming in and out are irrelevant. We're really more focused on... keep this profile of momentum in there... year after year.” (15:05)

8. How the Process Actually Works

Timestamps: 16:52 – 17:59

Simple implementation (e.g., trailing twelve-month price returns), with Dorsey Wright’s own flavor (e.g., point & figure charting).
Actively managed accounts are concentrated (20–25 names) for high active share; indexes use factor-based, not market-cap, weighting.
John: “We really do believe like, you know, if you’re going active management, you want high active share... we tend not to market cap weight here.” (17:01)

9. The History and Approach of Dorsey Wright

Timestamps: 17:59 – 19:37

Founded in 1987 by Tom Dorsey & Watson Wright, originally a research shop, running money since 1994; systematized momentum from 2005, now with $15B AUM across numerous asset classes globally.
John: “It was... a really big part of what we do... if we had this systematic way of implementing this factor, we can really do it.” (18:23)

10. Keeping It Simple: Avoiding Over-Optimization

Timestamps: 19:37 – 21:16

It’s easy to "over-jigger" a model—Dorsey Wright hasn’t changed their momentum model since 2005. Stick to one approach; don’t chase recent performance.
During tough periods, investors often want changes, but discipline pays.
John: “If we ever were to make a big change... it would probably be when we're doing well. The temptation is… ‘Oh, we're underperforming, we need to change the model.’ And that's kind of when it turns around and then you lose the benefit of that rebound.” (21:16)

11. Applicability Across Markets and Asset Classes

Timestamps: 22:08 – 23:43

While US large-cap is the flagship, momentum is robust in small/mid caps, international, commodities, and even fixed income, though leadership shifts by period.
John: “You can use momentum for commodities... fixed income... that kind of herding behavior exists in all sorts of different asset classes.” (22:58)

12. Managing Downside & Defensive Approaches

Timestamps: 23:43 – 25:17

Some strategies incorporate the ability to move to cash, others stay fully invested, shifting into “defensive” sectors at market bottoms (consumer staples, utilities).
Off bear market bottoms, value tends to outperform momentum—reinforcing diversification benefits.
John: “That's kind of that zig and zag and yin and yang we’re talking about. Like when value might do really great off a bear market bottom, momentum tends to lag…” (24:08)

13. Rebalancing and Turnover

Timestamps: 25:17 – 26:07

Strategies vary from weekly review to quarterly rebalance; turnover ranges from 70–125% annually; multiple timeframes work if the factor is properly handled.

14. Is Momentum Gaining Acceptance?

Timestamps: 26:07 – 27:03

More investors/advisors are open to momentum than ever, possibly due to longstanding advocacy by firms like Dorsey Wright.
John: “I think people are more receptive to it, at least now than when I first started at Dorsey Wright.” (26:32)

Notable Quotes & Memorable Moments

John Lewis (04:14):
"I'm the dumbest person at the cocktail party if we start talking about stocks because why do you like this stock? Because it's going up and if it goes up more, I like it even more."
Michael Batnick (04:53):
"Momentum requires you to kind of take the fundamentals out of it and go, sometimes there's this herding and there's recency bias and confirmation... and that like, makes up momentum."
John Lewis (13:18):
"I think you also have to be really upfront with people about, hey, you know, this is not something that we just want you to do for six months and kind of be in and out of it and try to time it and things like that. Like, you really do need to kind of be committed to these strategies..."
John Lewis (15:05):
"Selling is way more difficult than buying... we have predetermined sell thresholds... when it hits those thresholds, we sell it and we move on."
John Lewis (21:16):
"If we ever were to make a big change to one of our models or our strategies, it would probably be when we're doing well. The temptation is really like, 'Oh, we're underperforming. We need to change the model.' And that's kind of when it turns around and then you lose the benefit of that rebound."
Ben Carlson (11:02):
On meme stocks: "The bath salt version of momentum."
John Lewis (26:32): "People are more receptive to it, at least now than when I first started at Dorsey Wright."

Practical Takeaways

Momentum investing works over time due to persistent behavioral biases, even though it feels counterintuitive and simplistic.
Discipline and systematic, rules-based approaches are essential—behavioral pitfalls make momentum impossible as a “gut” strategy.
Momentum and value are natural portfolio complements, taking turns outperforming depending on cycle and environment.
Selling is the hardest part—predetermined rules remove emotional mistakes.
Momentum is robust across asset classes and markets, and implementation details (e.g., lookback window, rebalance frequency) matter but should not be endlessly “optimized.”
Investors should set and maintain realistic expectations, resist the urge to “time” or chase performance, and hold for full cycles.

Further Resources

To learn more about Dorsey Wright:
Visit dorseywright.com for research, free trials, and contact info for financial advisors.

This summary captures the critical content, wisdom, humor, and actionable advice from this Animal Spirits episode for anyone interested in momentum investing or seeking to deepen their understanding of modern factor investing.

Loading summary

Transcript66 lines

[00:00]
A
Today's Animal Spirits Talk youk Book is brought to you by Nasdaq. Dorsey wright. Go to nasdaq.com nasdaqdrsseyright to learn more about their whole suite of momentum strategies, SMAs, ETFs, and more. That's nasdaq.com nasdaqdorsyright welcome to Animal Spirits,
[00:18]
B
a show about markets, life and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.
[00:46]
A
Welcome to Animal Spirits with Michael and Ben. Michael, on today's show we have John Lewis. John is a CMT Senior Portfolio Manager at Nasdaq. Dorsey Wright, one of the largest momentum trading platforms in the US I guess that there is has to be, right? So I didn't realize John told us there $15 billion, that was news to me. That's pretty big for the momentum space.
[01:06]
C
Yeah, I would say the largest.
[01:08]
A
Yeah.
[01:08]
C
And when I say, I would say, I'm sure you know there's got to be a number one, so you can fact check me there, but according to me, they're the number one.
[01:14]
A
Yeah. So we've talked about this in the past. Why there's value is just this mammoth factor. Got to be the biggest one by I don't know what, how many times, but it's huge because value makes sense. Momentum does not. Value made sense to me immediately. Value investing index funds to me, light bulb went off immediately. I get it. I totally understand it. Momentum took me a lot longer to understand and I had to read people like Cliff Asness and Wes Gray and Meb Faber to understand this idea behind momentum investing. Like, well, why? Why would this work? It seems so simple. Like a dummy can do this, right? Or I'm gonna buy a stock that goes up. Great. It seems so simple. But then when you like put a process behind it and put some rules behind it and systematize it and say, I'm gonna have a buy discipline here and have a sell discipline here and I'm gonna take advantage of the behavior of market participants, then to me, oh, okay, now I get it. The behavioral side, that's when it clicked for me. It's behavior.
[02:11]
C
The value piece makes so much sense. As you were saying, oh, I'm gonna Buy a dollar for 70 cents. What they don't tell you is that Wall street doesn't sell dollars for 70 cents anymore.
[02:20]
A
Right? True. Yes. Yeah, yeah. It used to be 50 cents. Maybe that's inflation kicking in again. Obviously momentum is not. It's the kind of thing that doesn't work all the time. Nothing does. But I think especially, especially if you think about people in the financial advisor community, there was a huge buy in into value. Right. Think about how big DFA got and that was kind of what they were made on. Right. And I think the easiest way to explain it to advisors is if you have a value factor in your client portfolios. Momentum is the offset piece. It's the yin and yang. It's the other side of the teeter totter. They can complement one another because there are times when value works way better and other times when momentum works way better, depending on where we are in the cycle and the economic environment. And I think that's the idea to me that makes sense is like, not necessarily we're going for huge alpha, but it's. No, it's the diversification piece. That's why momentum makes sense to me. Anyway, we get into a lot more of that with John Lewis from nasdaq. Dorsey. Right. So here's our discussion with John.
[03:20]
C
John, welcome to the show.
[03:21]
D
Hey guys, thanks for having me.
[03:23]
C
So we are talking about momentum today. One of, one of, I guess in Jude Fama's words, the premier market anomaly. It's this type of thing that exists. Everybody knows it exists and yet it sounds like dumb. It sounds like it shouldn't. Like, wait a minute, you're telling me that if I buy things that are going up, like buy high and buy higher and you know, just keep doing that systematically, it actually, there's actually something there that works. And yeah, it does work, works very well. But investors seem to be very underinvested to it. At least when I'm look like thinking about ETFs, there's tens, hundreds of billions of dollars in value ETFs and shareholder yield and quality. And for some reason momentum doesn't seem to get a lot of love from investors, even though it's very well understood to have legitimacy.
[04:14]
D
Yeah, I mean, I think that's right. And, and you said it's kind of a dumb concept. And I agree, like I make a joke that I'm the dumbest person at the cocktail party if we start talking about stocks because why do you like this stock? Because it's going up and if it goes up More, I like it even more. So it is a concept that, you know, it doesn't seem like it should make sense, but it really does, and it works really well. And you're totally right that investors are really under allocated to that factor. And, and when you think about momentum in an overall portfolio context, like, it's a great diversifier to value and those other things. So, yeah, I've never understood why it's got such a bad rap and why people are so unwilling to do it.
[04:54]
A
I think part of the reason is behavioral and because the factor really is behavioral in nature. And I think the whole idea of value investing makes sense intuitively right away. I'm buying a dollar for 50 cents or whatever it is. Right. That concept makes sense. Momentum requires you to kind of take the fundamentals out of it and go, sometimes there's this hurting and there's recency bias and confirmation, all these crazy things that people do and that like, makes up momentum. So I think it's harder for people to wrap their brains around it. I certainly think, like, hey, I'm gonna buy this Stock that's up 100% in the last three months. I'm gonna buy more of it. I think it's really hard to do for people. It's hard to like, force yourself to do that. And I guess the question is, is that why it almost. For most people, it almost has to be rules based?
[05:35]
D
I mean, I think so. I think it's really, really difficult to do momentum without like a really disciplined and systematic way to do it. And that's one of the things that we really focus on a lot is, you know, the momentum factor is kind of easy.
[05:49]
A
Right.
[05:49]
D
Like you're not. It's pretty easy to rank stocks on trailing performance. Right. And why can't everyone do it? I think a lot of it comes down to the implementation kind of where the rover meets the road. That's really the unsexy part of investing. But I do believe, like, if you don't have a good process for this, it's not going to work because you are going to kind of give up on it at the wrong time. You'll get back in at the wrong time. And you just don't get many chances to get that wrong. Right. It just kind of destroys your returns over time if you don't get it right.
[06:21]
C
It seems like momentum works both ways. You want to buy stocks that are going up and you. You want to avoid stocks that are going down. I was reading research from Adam Parker at Trivariat this morning. And he was talking about what happens going into earnings and he said, quote, cheap stocks with bad momentum are not quote de risked into the print. They are anticipating the miss correctly. And the miss is a confirmation of the price action. Stocks with bad momentum that are cheap have never been punished more for missing so the market. There is wisdom and there is signal in stock prices. Even though I think a lot of traditional investors say, ah, this, the price is just what you could sell it at today, tells you nothing about its long term, tells you nothing about the value of a business. And maybe that's true over the very long term, but in the near term there is absolutely signal in stock prices.
[07:21]
D
Yeah, absolutely. And I think you're right. Like over the very long term, the fundamentals do kind of win out, right? I mean you can't, you can't survive at, at massive multiples forever. But we're looking really at the intermediate term time horizon, right? And that's really where all the alpha is for, for momentum. And you can get some pretty big dislocations away from fundamentals or things like that. And a lot of these stocks that are really good momentum names, they're not fully understood by the fundamental analyst community. And I think that's why they turn out to be like such good winners over, you know, 1, 2, 3 year time horizon type of thing.
[07:58]
A
So you mentioned earlier the fact that the momentum factor itself can also be a good diversifier because I think some people go into momentum thinking, yes, I'm going to outperform the market and historically it's shown that that factor has been very strong. But I wanted you to talk about where do the diversification benefits come from? Because I think it's interesting in the fact that a lot of people just assume, well, momentum is tech and growth and obviously it's not the same thing. Sometimes it is, but the way that I see it, it's almost like a chameleon strategy that the sectors are constantly changing and, and the types of stocks that are winning can and will change. So I just curious what you think about it from a diversification perspective.
[08:33]
D
Yeah, Ben, I think that's a good way to put it. It is kind of like a chameleon type of thing, right? I mean it will change, it will kind of go around the style box and things like that. And I think essentially when we look at momentum and let's just compare it to value, right? So we're really coming at the investment problem from two completely different angles. So momentum investing can be very, very good over time. So can Value investing. But a value investor is looking for things that have been beaten down. They want those stocks to revert to the mean and then they're out. Right. Because they're fully valued. A momentum investor is really looking at stocks that have demonstrated the ability to outperform everything else in the universe. And you buy those and you want that trend to continue. So you're really at two different parts of the cycle. And so when momentum strategies do well, very often value doesn't and vice versa. Right. So when you put these two things together, one is zigging while the other zagging, you may have two strategies that are able to outperform over say a five year time horizon, but they'll be one to two year stretches where one's working and one's not, and vice versa. It just kind of smooths out the ride over time. The excess returns are negatively correlated. And that's just a fancy way of saying, hey, look, you know, when value is doing well, momentum might not be, and vice versa.
[09:56]
C
John, you mentioned earlier the potential fundamental disconnect between the stock prices in a momentum basket and the underlying fundamentals of these companies. And sure, we saw that in 2020, late 2020, 20, 21. But more, more often than not, companies that are exhibiting momentum in their stock prices are also seeing momentum, their earnings. And the market is generally not dumb. In fact, it's the opposite. The market is pretty smart and it usually gets it right. The companies that are performing well are. Or the companies whose stock prices are performing well are generally the companies whose businesses are performing well. Can you talk more about that dynamic?
[10:33]
D
Yeah, I mean that, that's generally true. Right. The companies with good momentum characteristics often have a lot going for them on the business side of the equation, whether it's a new product, a big secular trend, something like that. It's very rare that you get these like fly by night names that really have no reason being, you know, up there. And maybe like the meme stocks or something like that. Right. Like that was kind of a different phenomenon. I wouldn't really classify those as kind of high momentum names, but those like
[11:02]
C
the bath salt version of momentum.
[11:04]
D
Yeah, exactly. The Florida man version for sure. Yeah, that was, that was kind of tough when that was happening. You know, just kind of side note, like those would sneak into your screens and things like that. And, and it was, you know, not, not, not great to see that kind of stuff getting in there. If you think about something like Apple Computer. Right. I remember when they first came out with the ipod, which I'm obviously dating myself, which is not good. I'm getting old, John.
[11:29]
C
I'm sorry. You know how I know you're dating yourself? You called it Apple Computer.
[11:32]
D
Yeah, yeah, exactly. You know, at first they came out with an ipod and I was just like, well, this is just a walkman that just has, you know, you don't put a tape in it anymore.
[11:43]
C
Right.
[11:43]
D
Well, all of a sudden, like they build this platform, that business, it's a great business. They keep iterating off of that business. That was a great momentum stock for a long time.
[11:52]
C
Right.
[11:52]
D
Another great momentum stock for a long time that nobody even thinks about was something called American Tower. Right. Like they build these cell phone towers, right. With all of this data flying around and it's not the case anymore. I'm talking about, you know, years ago, how this is one, this is just kind of an old example. But you know, that build out was a big thing. There was a ton of business momentum there. Like nobody knew that name. We had it in some of our indexes and things like that for a really long time.
[12:17]
A
So I want to talk about momentum this year a little bit. If you look at most of any momentum strategy, pick one out of a hat. This year it had an unbelievable start to the year. I think by some measures, like one of the best starts ever for the momentum factor. Right. Certain strategies are up anywhere from 30 to 40%. Really through, I don't know, the end of June or so, probably the first half of the year. It was really strong for momentum. Like you have a plenty of momentum strategies at Dorsey, Wright. I'm sure you guys had a great first six months of the year. I'm curious because I mean some of these strategies have come back in that performance couldn't have lasted forever. Right. You can't have 40%, six month returns go forever. How do you try to set the right expectations for a strategy like this that is inherently volatile? Like Michael said, momentum goes both ways, especially when things are going really well. How do you try to temper expectations when people. Because that's when people's eyes get really big and they go, oh my gosh, let's like keep putting our foot on the gas and going for more, more, more. And obviously like we said that stuff, it just can't last forever. It has to exhaust itself eventually. Yeah.
[13:19]
D
And you're absolutely right. So it can't last forever. And what you have to do is just, I think, be very open and honest about what the strategy is there to do, what the potential pitfalls are. And I Think you also have to be really upfront with people about, hey, you know, this is not something that we just want you to do for six months and kind of be in and out of it and try to time it and things like that. Like, you really do need to kind of be committed to these strategies, just like you do for a value strategy or low volatility or, or anything like that. So I, I think that's, you know, one thing we've done at Dorsey Ray, where we've been just been kind of hammering that same message for 20, 25 years. And I think, you know, that does set expectations. I think people kind of know what they're getting into. But yeah, I mean, this year has been, It'. Volatile. The volatility has definitely picked up this last month. And again, like you said, great start to the year. And then we've seen, you know, a lot of those names correct. A lot so far this month.
[14:18]
A
We get questions all the time from people who've got huge gains in stocks. Right. I bought this stock a few years ago in Nvidia or Tesla or whatever, you know, Amazon, Apple, one of these big tech stocks. And the question is always, how do I know when to sell it? Because I, I don't want to get into a situation where I see these gains evaporate or most of the gains evaporate, but I also don't want to get out of it too soon. And what if this thing just keeps going on a generational run? Like that is a qu. Like, I think it's really easy for people to buy stocks. Right. You can buy a stock because it is going up like momentum. You can buy a stock because it's down 50% and you think it's a great deal. Knowing when to sell stocks, I think, is one of the harder things. You can correct me if I'm wrong. There are no investors who are really well known for being really good at selling stocks. Right. It's just, it's a skill that not many people have. So I'm curious. I want you to talk about the sell side of momentum.
[15:06]
D
Yeah. So there are certainly no corrections that I have for you there. It is very difficult, and the selling is way more difficult than the buying. The way we look at it is what we're trying to do is keep the overall profile of the portfolio right into this kind of high momentum area. So when I look at it and when we look at it from a business standpoint, the individual names that are coming in and out are irrelevant. Right. We are really more focused on, hey, we need to keep this profile of momentum in there and we need to have this kind of overall like high momentum portfolio kind of year after year. So when we rank stocks, we might rank them like from 0 to 100.
[15:48]
A
Right.
[15:49]
D
And we have predetermined sell thresholds. So in some strategies we might sell something if it falls out of the top half of our ranks. And other strategies, maybe it's the top quartile tile of our ranks, but that's already kind of predetermined. And when it hits those thresholds, we sell it and we move on. Like we know from all of our testing that that works. I will 100% admit that with any one stock like anyone that's following that very closely or has some kind of better knowledge than I do, like you could time that better. Like we're going to make mistakes just like everybody else. But what we do know is that constantly doing this like day after day after day, that works over time. And so it is kind of messy on the sell side and we have plenty of things that turn around and we should have never sold them. But you really, that's kind of part of the real discipline and staying like unemotional about it. You just have to do what you need to do. And you know what happens tomorrow is what happens tomorrow. And if you have to buy it back, you buy it back.
[16:53]
C
So what goes into a strategy like this? How many bells and whistles are on top of. All right, I want to buy stocks that are going up, I want to weight them appropriately. What does that all, what does that process?
[17:02]
D
It's actually a lot fewer bells and whistles than you'd think. You can do it very, very simply with like a trailing twelve month price return and put the stocks into the portfolio. We do it a little bit differently. I think we have a way that we think works a little better. Dorsey Wright's also really known for point and figure charting and we do a lot of momentum there. But we kind of, we have the rules pre built. If we're doing like an active separately managed account, you know, we might have 20 to 25 names. So it's fairly concentrated. But we, we really do believe like you know, if you're going active management, you want high active share. We're not trying to mimic the index. We'll differ from it a lot. One of our indexes, you know, we might rebalance those quarterly and you know, we have a way to rank the stocks and then we, we generally weight in our indexes by factor. So the better Momentum names are going to get a higher weight in the index. So we don't, we tend not to market cap weight here. We think there's kind of like more efficient ways to do it over time.
[17:59]
C
John Hard digression. I should have led the show with this. I, I know the legend of Dorsey Wright a little bit, but I feel like they're one of the only names that I know of that has managed to turn technical analysis into like a large, well respected asset manager. And I really don't know a whole lot about how you all did that. What's the short history there?
[18:23]
D
Yeah, so the short history, I mean, Dorsey Wright was founded by Tom Dorsey and Watson Wright all the way back in 1987. And it was primarily a research shop. They started managing a small amount of money in 1994, but we really kind of accelerated that in like 2005, give or take. I started at Dorsey Wright in 2002, like right out of business school. And then we, we did a bunch of research and we kind of systematized this momentum factor. I think that was like a really big part of what we do is kind of coming to the realization that hey, if we had this systematic way of implementing this factor, we can really do it. And over the years I think we've, you know, we've had our ups and downs, but we've done pretty well. We've had different firms come to us for, you know, to work with them on different products or things like that. So now we're about 15 billion in assets under management. And that's all technically managed, right? It's really momentum factor based and we just kind of look at different universes. We can do it in emerging markets, developed markets, small cap, large cap. And so we've really grown that business and we are kind of one of the biggest pure technical asset managers out there.
[19:38]
A
I'm curious how much because you can get into really the minutia now when researching this stuff and change your endpoints. I wonder how much of a momentum strategy really is just you pick whatever timeframe you want in terms of price, right? The last six months, nine months, 12 months, three months. Whatever you use for momentum, how much of it is really just driven by that initial decision versus all the other bells and whistles that you can put on it. How much is, I guess, how much is too much in terms of making a strategy like this too complicated?
[20:07]
D
I think you can very easily make it too complicated and too over optimized. And I do think a lot of people are constantly jiggering with the strategy to kind of solve, you know, last week's problem or last year's problem for us. I think the. One of the realizations when we were putting these strategies together is like, look, we're not going to be optimal in every time horizon, but we've done a ton of research. Like, it's impossible to predict, like, what, what momentum factor is going to work best next year. Right. You just really don't know. So you have to kind of stick with something that works and just keep it rolling forward. So the separate accounts that we started up in 2005, like, those have been running since 2005. We haven't changed anything in there. We haven't changed the model. We haven't re optimized it. You know, stocks coming over the universe, but we're still running the same model today that we were back then sort of cut in.
[21:01]
A
Did you get tempted in 2008, did you ever get tempted to like, make a change at all or. I mean, because there was obviously some minimum crashes along the way.
[21:09]
D
Yeah, you get tempted a lot to do it. And I think that it also helps to have, you know, Dorsey Wright be an entire business built around this factor.
[21:17]
A
Right.
[21:17]
D
Like, I, you know, we don't just have two people sitting in a large asset management shop and everyone kind of looking over our shoulder being like, hey, you guys might need to do something. Like, we're committed to this. The whole firm is kind of built around this. And if we ever were to make a big change to one of our models or our strategies, it would probably be when we're doing well. I think the temptation is really like, oh, we're underperforming. We need to change the model. And that's kind of when it turns around and then you lose the benefit of that rebound. And I'll say, I mean, if we underperform for, I don't know, six to eight weeks, we start getting the calls right away, hey, your model's broken. And it's just, you know, kind of. It's just kind of like investor behavior. We try to talk them through it as best as we can, but we're not going to change it.
[22:08]
C
I would imagine that even though you run these strategies across various geographies and market caps, is US Large the flagship?
[22:17]
D
That's where we have the bulk of the assets. And especially on the. On the separately managed account side, again, it's a lot like when you're doing retail, separate accounts, it's like a lot easier to trade large cap US Stocks and things like that it's really tough to do like local foreign shares in a kind of a retail account. So we use ADRs. If we're doing something like that.
[22:40]
A
What do you think it looks like in terms of other, like how does mom look in terms of small caps or mid caps or even international stocks are emerging? Is it, is it really like a large cap story where there's just more hurting because these are the bigger name brand stocks? Or does momentum, is it pretty robust across all these other strategies and asset classes?
[22:58]
D
Yeah, it's generally robust across all of these different strategies and asset classes, although maybe not at the same time. So like this year, like our, our domestic momentum strategies on the SMA side are doing much better than international. And you know, there's some reasons for that, but you know, it's just like the momentum factor, at least the way we're implementing and looking at it is working better here right now in the U.S. but you know, a couple of years ago it might have been international is doing a little better. So it just kind of depends on, on the time frame. But yeah, I mean, you can use momentum for commodities. You can, we use it in fixed income. I mean, there's a number of different things you can use use with momentum. That kind of, you know, that kind of herding behavior that you talked about earlier exists in all sorts of different asset classes.
[23:43]
A
I'm curious too, because this momentum does work in the other direction and there can be some really nasty momentum sell offs too. Now, part of it is, like you said, setting expectations. How many of your strategies have a more defensive component where it'll be like a trend following or maybe there's just nothing that meets your momentum screens anymore.
[24:00]
D
Right?
[24:00]
A
You have these screens. There's no stocks that meet in because the stock market is crashing. Do you go to cash? Do you get more defensive or is it more of a relative thing?
[24:08]
D
So we do have some strategies that will go to cash, and then we also have some that are just designed to be fully invested. So, you know, certain investors want that ability to go to cash. You know, other financial advisors might not want that because that kind of messes up their overall allocation and things like that. So we do both. I think both can work. But if we're saying a fully invested type of strategy, it is more relative, like you said, Ben. So there'll always be something that pops up on the top of the screen. But at the bottom of a bear market, we might be buying a bunch of consumer staples and utilities and things like that, which Again, that's not great. When the market turns around, usually value does much better off of market bottom. And so that's kind of that zig and zag and yin and yen we're talking about. Right. Like when value might do really great off a bear market bottom, momentum tends to lag, at least like long only momentum goes up, just not as much as the market shorting moment. Momentum names, like laggard names at a market bottom is. That's really tough when you have a big bear market. That's really where the quote crashes come from.
[25:17]
C
How often do you rebalance or reconstitute these strategies?
[25:21]
D
Yeah, yeah, yeah. It depends on the strategy. So we have some active strategies that we're looking at once a week. Obviously we're not trading them once a week. So some of those strategies, like a more aggressive trading strategy might be like 125% turnover year. And then we have other ones that are like, you know, 70%. So completely reasonable for a strategy that you do need to have it adapt to the market. And a lot of our indexes, we can only rebalance those once a quarter. So like four times a year we'll rebalance the whole thing. So momentum works at those different time horizons. You do just kind of have to know how to set up the factor in order to handle those kind of different agency things when you're putting together a new product. But yeah, we have stuff that kind of rebalances at different frequencies and they all work because, you know, we've set them up to handle that sort of thing.
[26:08]
A
So markets seem like they're moving faster. Especially this, this decade just seems like it's kind of in a whole stratosphere of its own in terms of how quickly things are moving. You know, you guys said you're at $15 billion. Obviously there's buy in, but do you feel that there's more buy in or are people coming around to the momentum factor a little bit more than they would have in the past? Just because it seems like markets do have this, these quicker moves than they did in the past? Are people more receptive to the idea?
[26:33]
D
I think people are more receptive to it, at least now than when I first started at Dorsey. Right. And I don't know if that's an overall market thing or whether they've just been hearing our story for so long and they're like, oh, you know what, this actually works? And they've heard us talk about it and things like that. So I'm sure that must be part of it. At least from what I hear from different financial advisors and investors.
[27:03]
A
John, anything else that we didn't cover that you wanted to hit on?
[27:06]
D
It's been an interesting year for momentum. You know, it's really been concentrated in like the very top end of momentum, that kind of top decile. So it's been interesting. I haven't seen it like this for a while, so it's definitely been something new for the models and for me to handle as we, as we kind of go through this year.
[27:23]
A
For people who want to learn more, where do we send them?
[27:26]
D
You can go to dorseybright.com we've got our research hub out there. We've got some free research out there for you to read. If you like it, you can sign up for a free trial and get more access and things like that. So tons of information there. And then if you're a financial advisor and you're interested in like separate account or ETFs or anything like that, there's a number on that website. You can give us a call. We can tell you if we're on your platform or if you can go buy the ETFs or anything like that.
[27:50]
A
Perfect. Thanks so much, John. All right.
[27:52]
D
Thanks, guys.
[27:55]
A
Okay, thank you. You to John. Remember, to learn more about NASDAQ Dorsey wright go to nasdaq.com nasdaqdorsey Wright email us any questions, comments or concerns. Animal spirits@the compoundnews.com.