|
Let me not bury the lede. We built a concentrated momentum strategy we’re calling Porterhouse with Franklin Templeton, the $1.7 trillion global asset manager and long-time Ritholtz partner. These will be separately managed accounts for Ritholtz clients only. Josh and I will be hosting a webinar next Wednesday. If you’re interested in watching, and learning more about our services, you can get registered here. (Full press release here)
To quote Nobel prize winner Gene Fama, Momentum is the premier market anomaly. It’s one of those things that flies in the face of efficient markets when you describe it out loud. “Buy stocks that are already going up.”
I thought Warren Buffett and other great investors buy low and sell high; Buy something for 80 cents and sell it for a dollar. You’re telling me that it makes sense to pay $1 for what was once 80 cents? Yes. Buy high, sell higher.
Chasing stocks because you’re afraid of missing out is a great way to lose money. We’ve all been there and done that. But systematically chasing stocks that are going up and selling them when they break can be a wonderful strategy.
Momentum works because investors tend to underreact to good news. Show of hands, how many people see a stock at $100 that was $50 last year and say “I’m buying this. The market clearly knows something, and it’s more likely to go to $200 than back down to $50.” Exactly. Nobody does this, and this is what I mean when I say stocks underreact to good news. This type of “I can’t buy it here” feeds on itself, slowly drawing in buyers one by one.
One of the reasons I’m personally so happy to be invested in this strategy is because I cannot hold stocks for large gains. I’ve tried, I just can’t do it.
I know too much about how hard stock picking is. I know that most stocks aren’t worth marrying. So I’ve never held a stock for more than a double, and even that I’ve only done once, maybe twice. It’s the most natural impulse to sell winners and add to losers, but as the great Peter Lynch said, that’s like pulling out your flowers and watering your weeds.
Having a systematic strategy override my worst instincts is the whole point. Porterhouse doesn’t know what a double feels like. I got invested in the strategy in early January, and I already have two stocks that have doubled, and another one that’s up 95%. No way am I holding onto those winners if I had my druthers.
We’ve been working on the strategy all year. Obviously had we known momentum was about to go on a historic run, we would have allocated clients, let the plane to take off, and adjusted mid-flight. But that would have risked a crash, and that’s not how we operate around here. Timing these things is impossible. Such is life in this business.
Momentum is not something we just discovered. We’ve long believed in this structural market inefficiency and have allocated to it for years. Last year, we decided to go a step further and build our own version of it.
A few things differentiates Porterhouse versus what’s on the market. We’re looking at the signals monthly. Momentum is a fast-moving strategy and an annual reconstitution doesn’t quite cut it, in my opinion. Another way Porterhouse is different is we’re not looking at relative momentum. Momentum ETFs are fully invested even if there are no stocks going up because they have to own stocks.
We have strict rules here that allows the portfolio to go to cash if there is nothing working. In 2009, we wouldn’t have been jammed into staples, healthcare, and utilities because they were only down 25% or whatever.
To be clear, this is an aggressive strategy. It’s not intended to be any sort of hedge to an overall portfolio. But if we’re in a deep bear market and no stocks are going up, then we won’t own any stocks.
Porterhouse is meant to complement a balanced diet. And we feel investors don’t have enough meat in their portfolio, metaphorically speaking.
There are 147 ETFs and $760 billion in the US that lean into value. There are just 41 ETFs with $74 billion invested in momentum. And getting back to what I said earlier, that makes sense when you think about how people are taught to invest. Buy a dollar for 80 cents. That’s not what we’re doing here. This is the premium cut. Winners only.
We built Porterhouse on Canvas, the custom indexing platform now run by Franklin Templeton, which acquired it from O’Shaughnessy Asset Management, a firm we’ve worked with since Ritholtz started in 2013. Our roots run deep.
We had the idea, but we lacked the quant and engineering chops to turn a screen into an investable portfolio. Franklin does. The partnership has been everything we hoped for, and we can’t wait to show you what we’ve built.
Ritholtz Wealth Management (“Ritholtz”) is a Registered Investment Adviser. Registration does not imply endorsement or a certain level of skill or training. Advisory services are only offered to clients or prospective clients where RWM and its representatives are properly licensed or exempt from licensure. Advisory services are only offered to clients or prospective clients where Ritholtz Wealth Management and its representatives are properly licensed or exempt from licensure. Investing involves risk and possible loss of principal capital and there is no guarantee that the intended outcomes are achieved. Past performance is no guarantee of future returns. No advice may be rendered by Ritholtz Wealth Management unless a client service agreement is in place.
The Porterhouse Portfolio Strategy is separately managed through Franklin Templeton/O’Shaughnessy Asset Management, a Sub-Adviser of Ritholtz Wealth Management. The Porterhouse Portfolio Strategy is new, with no operating history, and therefore does not have a performance history. As a result, prospective investors will have no track record or history on which to base their investment decision.