Value or Momentum? How 'Bout Both

Are you a value investor, or a momentum investor? In a recent piece for Yahoo! Finance, Patrick O’Shaughnessy says you’re better off being both.


 “I ran a series of tests combining value and momentum into a single factor, giving weights from 0-100 for both value and momentum factors—so, for example, a 50/50 combination gives equal weight to a stock’s momentum rank in the universe and its value rank in the universe,” O’Shaughnessy wrote. “The best combination, measured by risk vs. volatility, was 70% value, 30% momentum. This strategy focuses on cheap stocks, but avoids those that are still in relative free fall versus the market.”

O’Shaughnessy looked at some of the nuances of the test results, and says the bottom line is that combining value and momentum works better than using one or the other. “With factor investing all the rage, it’s good to know that both of these strategies work, and that they work at different times,” he says. “But the most powerful combination is a strategy that measures both value and momentum at the stock level.”