Podcast Summary: Excess Returns

Episode: The Market's Best-Kept Secret | Travis Prentice on Momentum's Surprising Edge

Date: April 30, 2025
Guests:

• Travis Prentice (A), CEO & CIO, Informed Momentum Company
• Jack Forehand (C), Co-host
• Justin Carbonneau (B), Co-host

Episode Overview

This episode features Travis Prentice, an experienced investor and CEO at the Informed Momentum Company, discussing the "momentum" investing factor: what it is, misconceptions about it, how it works across different markets, and why it remains persistently effective. The conversation delves into practical nuances of implementing momentum strategies, misconceptions (especially around turnover and risk), combining momentum with other factors like value and quality, and the behavioral underpinnings behind momentum’s success. The discussion is rich with both academic insight and decades of practitioner perspective.

Key Discussion Points and Insights

1. What Is Momentum Investing? (00:00–06:34)

• Momentum is adaptive, not static.

  • Momentum strategies focus on stocks that have recently outperformed their peers, not on subjective parameters like value or growth.
  • "It doesn't matter what you think. It really matters what the market thinks." — Travis (00:00)
  • Even prolonged winners (e.g., Nvidia) may not appear in momentum portfolios at all times, owing to shifting relative performance.

• How momentum is measured:

  • Most common: “12 minus 1” strategy (12-month performance minus the last month), since the most recent month can show short-term reversals.
  • Relies on cross-sectional (relative) strength: selecting top performers within a defined universe (market cap, geography, etc.).
  • “So it's always the top performing stocks...compared to a universe, a selection universe.” — Travis (03:21)

• Momentum ≠ Growth

  • Although correlated at times, momentum is style-agnostic; it will favor growth, value, or any sector/style that is currently trending.
  • “Momentum is always reorienting to what's working, what's trending...it just cares about what's outperforming.” — Travis (05:23)

2. Common Misconceptions and Real-World Implementation (06:34–09:06)

• Academic simplicity contrasts with the challenge of real-world execution.
• Critical implementation variables: selection universe, rebalance timing/frequency, handling of turnover and transaction costs.
• Retail investors often make avoidable errors by rigidly forcing exact “top 10” rules or overreacting to ranking changes.

3. Why Does Momentum Work? (12:25–13:41)

• Behavioral explanation trumps risk-based:
  • Persistent behavioral biases: Investors underreact to good news (at buy point) and overreact to trends at sell-point.
  • “We see every day a chronic underreaction at least at buy point for a momentum strategy...and then overreaction to current trends at sell point.” — Travis (12:25)
• Momentum and value as opposites: Value exploits overreactions to bad news; momentum exploits underreactions to good news, making them powerful complements.

4. Addressing Criticisms: Turnover, Transaction Costs, and Taxes (13:41–18:14)

• Turnover is necessary, but manageable:
  • Academic critiques often overstate modern transaction costs. Industry studies (e.g., AQR, BlackRock) and Travis’s own work show momentum can survive frictional costs.
  • Momentum’s alpha is time-sensitive; after the formation period, alpha persists for 6–9 months, then decays—necessitating turnover (150%-200% per year).
• Tax efficiency surprisingly strong:
  • Momentum holds onto winners longer (qualified for long-term capital gains) and realizes short-term losses more so than many expect, offsetting gains.
  • “Despite momentum having like five times higher turnover than value, the tax efficiency is almost the same over long periods of time.” — Travis (16:52)

5. Crafting and Refining Momentum Strategies (18:14–24:04)

• Beyond just price screens:
  • Informed practitioners incorporate multiple signals: price trends, extended lookbacks, fundamental momentum (earnings/sales improvements), and more.
  • Combine quantitative ranking with judgment, especially when assessing significance of rank changes (e.g., from 95th to 89th percentile).
• The twin momentum effect:
  • Combining price momentum and fundamental momentum leads to longer, stronger outperformance and reduces false positives.
  • “The highest expression of momentum is price reflecting something and not just price.” — Travis (22:02)

6. Subtleties of Price and Fundamental Momentum (23:03–25:12)

• Momentum is best expressed as price reflecting improvement, not just growth (e.g., rising profit margins, earnings revisions, not just top-line growth).
• This improvement lens allows strategies to flex into value stocks when fundamentals improve, increasing adaptability.

7. Advanced Nuances and Practical Considerations (25:12–32:01)

• Continuous vs. discrete momentum:
  • Continuous, steady momentum is generally more reliable than sudden, one-day jumps (but context matters, e.g., biotech stocks).
  • Ongoing research at Informed Momentum to optimize weighting between these types.
• Market and segment differences:
  • Momentum works well globally and across caps, particularly in small caps and emerging markets.
  • Exception: Japan, where value outperforms momentum; combining momentum with value can enhance results there.
• Evolving factor strategies but avoiding “overfitting”:
  • Stay updated and introspective, but changes to core signals must be justified by persistent out-of-sample performance, not just recent backtests.
  • Signals that worked in earlier market structures (e.g., analyst upgrades before Reg FD) may lose efficacy.

8. Portfolio Construction: Practical Choices (34:43–40:54)

• Rebalancing frequency:
  • Optimal: Incremental, stock-by-stock, as signals change (informed by daily monitoring), rather than fixed calendar periods.
  • High-frequency, incremental rebalancing keeps exposure current without excessive turnover spikes.
• Portfolio concentration and sector exposure:
  • Slightly more concentrated than generic top-decile methods; aim for “hardcore momentum” exposure without dangerous overconcentration in one sector or country.
  • Risk checks: Limit contribution to active risk from sector/country overweights to maintain diversification.

9. Momentum Crashes and Risk (39:04–44:58)

• Definition of a momentum crash:
  • Occurs when laggards (losers) in the market suddenly soar (e.g., after a bear market), hurting long-short and pure momentum portfolios.
  • “If you look at the top 15 worst months for momentum, it's not the winners being sold, it's the loser side...that crashes upwards.” — Travis (40:09)
• Risk (volatility) perspective:
  • Contrary to perception, momentum is not objectively riskier than value; it’s less risky by standard deviation, drawdowns, and underperforms less frequently.
  • Risks in momentum are “short, sharp, and sudden,” while value underperforms gradually—“death by a thousand cuts.”

10. Combining Momentum with Other Factors (44:01–45:20)

• Portfolio diversification:
  • Optimal portfolios blend momentum, value, and quality—each performs in different regimes, maximizing information ratio and smoothing returns.
• "By combining momentum value and quality in kind of a diversified portfolio...better outcomes." — Travis (44:58)

11. The Practitioner’s Philosophy and Learning (45:20–48:20)

• Momentum’s edge is humility—rely on signals, not personal conviction about individual stocks.
• The rise of passive products (market cap weighted indices) provides a weak-form tailwind to momentum investing, as capital flows favor outperformers by design.
• “Have our investors assets on the right side of these powerful signals and not get in the way too much...” — Travis (46:35)

12. Closing Lessons and Personal Beliefs (48:20–50:20)

• Turnover:
  • Turnover is not universally bad; it should match the needs of the strategy (high for momentum, low for deep-value).
  • “For a momentum strategy, you don't want a momentum strategy with low turnover. That much I know.” — Travis (48:33)
• Diversification and humility:
  • The key investor lesson: diversify and don’t tie ego or emotion to stock moves.
  • “It doesn't matter what you think. It really matters what the market thinks.” — Travis (49:24)
  • Stay balanced, unemotional, and willing to rebalance when portions of the portfolio get extreme.

Notable Quotes and Memorable Moments

• “Momentum isn't static...it's going to always reorient to what's working, what's trending. So it doesn't care...what the valuation is...it just cares about what's outperforming.” — Travis (00:00)
• "Momentum is the best performing factor precisely because of that adaptability, where it just goes wherever the strength is." — Travis (07:19)
• “There's a strong, robust, persistent premium over not just equities, but other asset classes as well.” — Travis (12:25)
• “We see a chronic underreaction...at buy point for a momentum strategy, and then at sell point there's also an overreaction.” — Travis (12:25)
• “Momentum and value are such a great pair...they exploit different behavioral biases.” — Jack (13:29)
• “Momentum is always moving to the winners...winners run longer and you cut your losses short.” — Travis (16:52)
• "The highest expression of momentum is price reflecting something and not just price." — Travis (22:02)
• “Momentum's powerful enough that you don't want to get your ego or your emotion in the way...” — Travis (45:20)
• "Unemotional and diversified." — Travis (49:24)

Timestamps for Key Segments

| Segment | Time | |----------------------------------------------|-----------| | Defining Momentum & Its Dynamic Nature | 00:00–06:34 | | Why Momentum ≠ Growth | 05:23–06:34 | | Real-World vs. Academic Simplicity | 08:26–09:06 | | Why Momentum Works (Behavioral Bias) | 12:25–13:41 | | Turnover, Transaction Costs & Taxes | 13:41–18:14 | | Fundamental Momentum & “Twin” Approaches | 21:42–25:12 | | Continuous vs. Discrete (Jump) Momentum | 25:12–28:31 | | Geography and Market Cap Effects | 28:31–32:01 | | Portfolio Construction (Rebalancing, Concentration, Risk) | 34:43–40:54 | | Momentum Crashes & Risk | 39:04–44:58 | | Combining Factors: Momentum, Value, Quality | 44:01–45:20 | | Rise of Passive Indexing | 46:35–48:20 | | Closing Lessons (Turnover & Diversification) | 48:20–50:20 |

Summary Takeaway

Travis Prentice presents a compelling, practice-tested case for momentum investing: it’s dynamically adaptive, behaviorally anchored, robust across time and markets, but requires care in implementation. Momentum thrives when combined with value and quality, defying many of the criticisms around risk, turnover, and tax losses. Humility, discipline, and diversification—rather than strong subjective conviction—are the keys to long-term success with this and any factor-driven approach.