An In Depth Look at Momentum Investing and Trend Following with Jack Vogel

Episode Summary

Executive Summary: This episode explores momentum investing and trend following with Dr. Jack Vogel of Alpha Architect. The discussion distinguishes momentum from growth, explains why momentum may work via behavioral underreaction and risk, reviews measurement choices like 12-1 momentum and consistency screens, and debates transaction costs, fundamental momentum, portfolio construction, and implementation tradeoffs. It closes with practical guidance on trend following’s role, limits, and investor suitability.

Main Topics: Defining momentum investing (Priority: 5/5): Vogel explains cross-sectional momentum as buying recent winners and ignoring losers, typically using past 9-15 month returns and excluding the most recent month to avoid short-term reversal. Momentum vs. growth (Priority: 5/5): The conversation emphasizes that momentum is not the same as growth investing: overlap is limited, momentum rotates dynamically, and it can shift away from falling growth names when conditions change. Why momentum works (Priority: 5/5): Vogel frames the academic debate as risk versus behavioral explanations, citing underreaction to good and bad news as a leading behavioral reason for continuation in prices. Measurement choices and consistency (Priority: 4/5): They discuss 12-1 momentum, composite signals, and the value of consistency screens such as 'frog in the pan,' where smoother, more persistent momentum tends to outperform jumpy price moves. Transaction costs and capacity (Priority: 5/5): The episode examines whether momentum survives trading costs, contrasting pessimistic academic models with practitioner research suggesting meaningful capacity remains, though not unlimited. Fundamental momentum and portfolio construction (Priority: 4/5): The hosts and Vogel compare price momentum to fundamental momentum and debate siloed versus combined factor portfolios, noting tradeoffs between diversification, turnover, and investor clarity. Trend following strategy design and suitability (Priority: 5/5): Trend following is presented as a single-asset timing approach using moving averages or time-series momentum, with clear pros and cons, high tracking error, and suitability for only certain investors.

Key Arguments: Momentum is best understood as buying stocks with strong past returns over an intermediate horizon, usually 9-15 months, while excluding the most recent month because short-term reversal is common. Momentum is not equivalent to growth investing; the overlap between high momentum and growth stocks was described as only about 20%, and momentum can rotate out of expensive growth names when trends reverse. Momentum may persist because investors underreact to new information, causing price adjustments to unfold gradually after earnings surprises or negative news. Composite momentum signals can help in some cases, but many measures are highly correlated, so the incremental benefit may be smaller than advocates claim. Consistency matters: high momentum accompanied by smooth, persistent gains tends to be more robust than firms with one large jump and flat performance. Transaction costs are crucial, but academic models may overstate them; real-world capacity likely exists, though a very large, high-turnover momentum strategy could still be constrained. Fundamental momentum and price momentum are related, but price momentum offers better portfolio diversification for investors already tilted to value or other factors. Siloed factor sleeves are easier for investors to understand and maintain, while combined factor portfolios may obscure what is driving results and can create rebalancing conflicts. Trend following differs from stock momentum because it times one asset class rather than ranking securities; it can protect in prolonged declines but will often underperform in rapid rebounds. Trend following requires a very strong stomach because it has the widest tracking error among these strategies and can spend much of its time out of sync with broad markets.

Data Points: High momentum / growth overlap: ~20% - Vogel cites this approximate overlap to show momentum is not the same as growth investing. Momentum lookback window: 9 to 15 months - Intermediate-term horizon Vogel says is generally used to measure momentum continuation. Momentum rebalancing frequency: About every 3 months - Vogel suggests quarterly rebalancing as a practical implementation choice, despite academic monthly testing. Frog in the Pan study: High momentum driven by consistent momentum - Referenced as evidence that steady price advances outperform jumpy gains. Trend-following favorable decade spread: 6% spread - Vogel says trend following beat buy-and-hold by about 6% over the 2000s, when equities had two major drawdowns. Buy-and-hold stock outcome 2000-2009: Lost money - Used to illustrate why trend following became popular after the financial crisis. Trend-following outcome 2000-2009: Made 5% - Compared with buy-and-hold stocks over the same decade. Trend-following loss frequency: 8 to 9 out of 10 times - Vogel says trend following will often be wrong or out of the market, by design. SP 500 trading cost estimate from academic model: ~62-63 basis points - Vogel cites AQR’s test of a model claiming momentum doesn’t exist, applied to the S&P 500. iShares/Vanguard S&P 500 cost estimate: ~10 basis points - Used to argue some academic trading-cost models may overstate real costs by 5-6x. US total stock market model implication: Entire risk premium removed - Vogel says one academic model implied trading costs would erase the whole equity risk premium. Trend-following benchmark suggestion: 75% stocks / 25% cash - Vogel argues this may be a more realistic benchmark because trend following is invested roughly three-quarters of the time.

Pivotal Quotes: "Momentum is not growth investing" — Jack Vogel: Used to clarify a common misconception about the strategy. "In general, you want to be buying the high-momentum names that have more consistent momentum" — Jack Vogel: Explaining why consistent momentum screens may improve strategy quality. "Trend following has the largest tracking error and you require the toughest stomach to stick with" — Jack Vogel: Summarizing the emotional and practical challenge of trend following.

Implications: Listeners should view momentum and trend following as useful but distinct tools, best used with realistic expectations, diversification, and disciplined rebalancing. The discussion suggests implementation details, trading costs, and investor temperament matter as much as the factor itself.