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• W305433907 abstract "Abstract Momentum investing is the practice of investing in securities that have substantially outperformed the market in recent periods. This paper examines the stock selections of two groups of investors, professional analysts and individual investors, made in the well-researched dartboard contest conducted by the Wall Street Journal. We find that both groups exhibit a strong tendency to select momentum securities, with the individual investors concentrating on securities with extreme momentum. The professional analysts are successful with the momentum strategy but the individual investors are not. We conclude that momentum investing is not a viable strategy for individual investors. © 2006 Academy of Financial Services. All rights reserved. JEL classification: D82; G12; G14 Keywords: Momentum investing; Individual investors 1. Introduction A momentum investment strategy involves the purchase of equities that have recently outperformed the market on the expectation that this momentum will continue. Chan, Jegadeesh and Lakonishok (1996) assert that . . momentum investing constitutes a distinct well-recognized style of investment in the United States and other equity markets. Both the practitioner and academic literature discuss momentum investing. To date, however, neither set has examined the stock selections of a group of investors to test for the existence and profitability of momentum investing. This paper examines the security selections of two groups of investors, professional analysts and individual investors, participating in the Wall Street Journal's Dartboard Column. Because these contestants are judged on the basis of returns over the six-month period following the announcement of their picks, they have an incentive to pick short-term winners. Given the well-established empirical finding that winners from a given six-month period continue to be winners in the next six-month period, these contestants may be well served by a momentum strategy. We examine and compare the selection of both groups of investors to determine if they appear to engage in momentum investing and if their investment strategies appear profitable. The results indicate that both individual investors and professional analysts show evidence of momentum investing. We find that individual investors generally earn lower returns than the market and that professional analysts generally earn higher returns than the market. Overall, the professionals earned significantly higher market-adjusted returns than did the individual investors. Thus, the results argue against the practice of momentum investing on the part of individual investors. In the next section, we briefly discuss the extant literature on momentum investing divided into segments based on the practitioner and academic literature. In Section 3, we discuss the stock selection samples that are used in our analysis. In Section 4, we report our test methodology and empirical findings. This discussion is followed by a conclusion. 2. Momentum investing and momentum securities 2.1. The practitioner literature: momentum investing, causes and results The practitioner literature describes the existence of momentum investing and has identified this behavior as the cause of the technology stock crash of March 2000. For instance, Burton Malkiel (2000), writing in the Wall Street Journal, defines momentum investing as the practice of buying stocks that have recently experienced large gains relative to the market. Malkiel identifies this tendency as the cause of the spectacular rise in Nasdaq stocks from October 1998 to March 2000 and as the cause of the consequent crash. Jacobs (2000) argues that individual investors participating in momentum investing believe that the market provides upside potential in high-flying stocks with limited risk since a loss limit is available merely by selling if prices begin to fall. …" @default.
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• W305433907 title "Is Momentum Investing a Viable Strategy for Individual Investors" @default.
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