Last week I looked at a paper highlighting a ‘persistent-anomaly’, the happy-staff effect. This week I look at another paper featuring another persistent (at least in the U.S.) anomaly, momentum.
The U.S. market for many years has rewarded investors who buy things that have gone up (because they reliably go up more, true) and sell things that are going down (because they often then go down more).
This shouldn’t happen according to financial theory as any predictably profitable strategy should fade over time as more people notice the effect and crowd in. Moreover, the effect appears not to be universal as it doesn’t appear in the world’s second largest stock market, China.
The U.S. effect is believed to be a product of high institutional participation, ‘good fund management’ not being the same as ‘good investing’ [A big subject for another day].
Jun Du (et al.), from the Guanghua School of Management at the Peking University decided to take a closer look into China to see if separating punters from the pros would show the two groups operating differently as a potential explanation for the absence of China effect; and it does.
The China markets require investors to participate in minimum lot sizes which has the effect of drawing retail players into stocks with lower prices. Exploiting this phenomena allowed the researchers to separate behavior patterns of the minnows from the whales in a way not possible in the U.S.
The bottom line. Insto-investors in China are the same trend following dullards as U.S. peers, however the higher percentage of retail-punters masks the effect and, in aggregate, cancels it out.
High priced stocks in China though do exhibit strong momentum and investors would be wise not to let the overall market no-momentum characteristic cause them to overlook this fact.
There’s also some implicit advice here for investors in U.S. markets. Since the outbreak of COVID-19 retail participation has risen which would suggest momentum-effects should be weakening. Perhaps then momentum won’t turn out be such a persistent-anomaly after all?
You can access the paper in full via this link Retail Investors and Momentum.
Happy Sunday.