Book Review: Quantitative Momentum: A Practitioner's Guide to Building a Momentum-Based Stock Selection

Author: Wesley R. Gray, Jack R. Vogel

Originally published: 2016

Wesley Gray and Jack Vogel's, Quantitative Momentum is a handy practitioner's reference for anyone interested in momentum as a quantitative investing strategy. Books on quantitative approaches to stock selection are not as mainstream as value investing. This book fills the gap. It also helps readers connect systematic investing with behavioral theory by examining relationships between theory, practice and their historical underpinnings.

Detailed explanations of how academic research and practitioners' implementation in momentum investing have evolved build confidence in the momentum models the authors present.

Technical analysis is often used to describe quantitative investing. Should technical analysis be categorized as a quantitative investing strategy? Gray and Vogel provide a historical account of how technical analysis emerged as a stock-picking discipline. Dutch merchant Joseph de la Vega's 1688 book, "Confusion De Confusiones", and rice trader Munehisa Homma's 1755 work, "The Fountain of Gold", the authors explain, are the earliest documented reference points on ways emotions affect prices. Gray and Vogel seek to draw a connection between technical analysis and behavioral finance.

From Benjamin Graham to Warren Buffett and George Soros to Andrew Lo, the authors introduce the reader to debates and attitudes toward investing. Gray and Vogel urge practitioners to carefully look at the underlying investing philosophy instead of a blanket statement, and argue for evidence-based investing. One of the earliest works on momentum, the authors point out, is Robert Levy's 1967 paper "Relative Strength as a Criterion for Investment Selection". This paper demonstrated how profits could be attained by purchasing the strongest stocks.

However, the Efficient Market Hypothesis and Malkiel's classic "A Random Walk Down Wall Street" dominated investment thinking over the next two decades. There was a two-decade pause before practitioners started accepting momentum as an investing philosophy. Jegadeesh and Titman's pioneering 1993 work on momentum - "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency", is now considered the best reference to understand momentum investing. Eventually, the evidence became so overwhelming that "Momentum" was crowned the premier anomaly by the biggest proponent of EMH: Eugene Fama.

Why does momentum work? The authors, based on the literature, provide two main reasons. First, investors underreact to positive news reflected in the strong relative performance. Second, implementing a momentum strategy presents a career risk. Not many want to take up strategies where the maximum downside could be more than 50%.

In summary, Quantitative Momentum by Wesley Gray and Jack Vogel serves as a comprehensive and insightful exploration into the world of momentum investing. This book is not just an academic treatise; it's a practical guide that challenges and provides actionable references to both practitioners and academics.