But not the way the fine folks at VerdadCap.com are thinking in another wise, interesting piece. Without the benefit of AI, I read their latest and coopted to another thought. Replace the word “assets” with the word “investment manager.”
The “robust and persistent” premia as applied here to hiring investment managers is relevant. Still. Forever. Very few people can walk into their offices and make the pitch – “These guys have truly sucked, let’s hire them.” It thus takes “a few years” for the math of said “few years” to move out and to the right of your rolling “3 5, 7 and 10 year math.”
So no one cares. Until the quarter that seems to make you a trailing genius. And then the momentum of “can we give you money” starts to change – usually about 3 years after the actual performance changed. Rinse and repeat.
And yes, I think it also applies to the “peer thing” as well. Over some elusive time period, better business models and better management will differentiate from a peer group.
I hear our phone ringing.
Momentum—buying recent winners and selling recent losers—remains one of the most robust and persistent premia in global equity markets, more than thirty years after its initial documentation by Jegadeesh and Titman (1993). Unlike many published factors that fade after discovery, momentum has continued to deliver positive abnormal returns across geographies and asset classes.
At its core, a momentum strategy operationalizes a simple intuition:
Assets that have outperformed tend to continue to outperform, and assets that have underperformed tend to continue underperforming.
A leading explanation for this phenomenon is limited attention: markets adjust slowly to new information, especially when information is complex or arrives gradually. Traditional stock momentum relies exclusively on a firm’s own trailing returns as the proxy for “new information.” This is a direct effect.
But focusing only on a firm’s trailing performance misses a substantial portion of the information set. Firms compete, interact, and evolve within economic networks of suppliers, customers, complementors, and competitors. News affecting one firm often spills over to others. If markets incorporate these indirect signals with delay, then a firm’s future returns should be predictable from the performance of its peers. This insight motivates what we call peer momentum, a member of a broader class of indirect effect signals.
