Monday, October 24, 2005
Momentum Returns To Japan
Price momentum has long been absent as a factor systematically contributing to favorable investment return in the Japanese stock market. So much so that anyone who's had the misfortune of being a momentum investor over any 5-year contiguous interval during the past fifteen years has, in all probability, undergone an ego-cleansing change in profession or has reinvented themselveves as a US stock trader, or a commodity investor. Or anything, pray tell, that trends - preferably for very very long periods of time. Only a prescient few have got it right year in and year out.
The hiatus of naive price momentum from the Japanese market has led most academic observers, who've in the last half-decade began taking momentum seriously, to issue geographical caveats similar to the warnings offered by the UK Foreign Office or US State Dept.: Japan is different! Barra, too, recognized the importance of "Trend ga tsuyoi" (literally translating as "there's a strong trend") recently adding what might be the only non-econometric factor in their model. Even Dr. John Brush at Columbine, doyen of investigators into the subject of persistence, labels Japan a no-go area for those seeking profit from serial correlation. Dr Brush is more sanguine about the large black hole in academic finance where an explanation for the phenomena should reside. He highlights the cruel choice theoreticians must make between bending the existing efficient markets & rational investor framework to accomodate the empirical evidence for momentum, or discarding existing theory and creating some replacement.
Younger traders/PM's don't seem to have any conceptual problems with price momentum, presumably because it dramatically simplifies the investment decision-making process. For them, it seems as natural as the existence of the remote control, or a President who says "Nu-kee-lar, and plays with sock puppets. This is useful since the young ones typically have little else upon which to base their decisions. And they've probably never lived through a three-standrad deviation event or a demoralizing multi-period bear market where all semblances of hope and optimism are painfully and systematically excised from one's being, neuron-by-bloody-neuron. Older people on the other hand, are decidely disturbed momentum. Perhaps because even with all of their experience and wisdom, it remains mostly inexplicable. And if there is one thing the older generation dislikes, it is that, after many trips around the sun, the feeling of failure at not being to explain something as simple as some over-valued piece-'o'-crap stock is rising uncontrollably.
But just as its epithet has been carved into its tombstone, it's reappeared with vigor not seen since the great bull market of the late 1980's. And it's everywhere! It's in the daily cross-section. It's on the tails. It's short-term, medium-term, long-term, arrrrgh! Help!! T-E-C-H-H S-U-U-P-P-P-O-O-O-R-R-R-T!!
Whew, now that I've got that off of my chest, I will say that actually, it's not that bad. There remains lots of value out there in Japan - both absolute and relative. And while some momentum IS indeed egeregious (check out the Titanium Stocks 5726 & 5727) whether growth stays or is a passing fad, much of it still falls into Cliff Asness's categorization of "value + momentum", and it's a sweet and comfortable spot to be. There remain numerous and plausible constraints and encumberances upon growth - both at the enterprise and national level and these will be explored in further posts. But the takeaway is that "Momentum is Back", brought initially IMHO by the thundering herd of American fund managers (both hedgies and long-only). In the shorter-term, those who ignore it or treat it cavalierly do so at their financial peril.