There has been considerable debate about the role of momentum in sports. In a landmark study, Thomas Gilovich and several colleagues provided evidence that the "hot hand" in basketball was nothing more than a myth. Since then, there has been considerable research suggesting that many of the old saws about sports are untrue, and a movement toward more enlightened analysis has emerged, best exemplified in Michael Lewis' book Moneyball.
In this weekend's Wall Street Journal, Allen St. John wonders about the idea of "momentum" heading into baseball's post-season.
He writes that "while much is often made about late-season momentum as a harbinger of playoff success, in reality the relationship between the two is small... The playoffs are truly a second season. Only once since the advent of the wild card has the team with the best regular-season mark (the 1998 Yankees) won the World Series."
So if your favorite team has limped into the post-season, don't worry about it! Occasionally, there are legitimate reasons to fret over lost momentum. If a team has experienced a disastrous September because of injuries to its top starters, that will be a problem heading into the post-season -- not because of momentum, but because the pitchers are likely to remain unavailable!
I would argue that investors should look at the stock market the same way. Rather than buying into the idea of "momentum" in the stock market (I've seen no evidence that such a phenomenon really exists), think about factors that actually effect the business. Leave the cliches about "fighting the tape" and "moving averages" to the old wives.
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Reader Comments (Page 1 of 1)
9-30-2007 @ 3:25PM
michael schneider said...
Interesting but the entire regular season record wouldn't be a good measure of momentum, imo, because momentum usually refers to more recent behavior- like the record over the last month maybe. Perhaps more important is that playoffs aren't markets-- from what I can see they seem to be a different class of behavior.
Momentum exists- the question is whether momentum is a good quality to have. Bubbles, I think, are one form of evidence for momentum in markets-- people buy what other people are buying. A stock that hasn't moved for a time tends to get shunned or labeled as a "dog." A stock that is moving looks attractive-- and even may bring out animalistic emotions from cave man days of hunting beasts etc. There is some logic behind the momentum concept in markets as most market participants don't have complete knowledge of what they are buying so a lack of interest may signify there is something wrong with a stock that you don't know about. If somebody else wants something really bad we tend to value it more- if no one wants it we doubt it's value. Auctioneers see this all the time as bidding sometimes get crazy- even on sites like eBay sometimes. I think momentum buying can work short term. But I would agree with your point (I think its your point) that better strategy may be to act as a contrary to this strategy since so many people are affected by it. In other words, look for something as dull as dirt. I recently recommended a stock Traffix for those who like to watch paint dry (it's also on the list of Weird Media Stocks at http://www.Barrelomedia.com). Traffix just last week agreed to a merger deal which sent the stock up 30-40% in one day. Until then, it hadn't done anything but pay a good dividend and wiggle around a little. The stock had such a good balance sheet and payout that you didn't really have to worry about it even when the market got bad.