Talk Your Book: Price Is the Ultimate Factor
Animal Spirits Podcast
Michael Batnick and Ben Carlson are joined by Bill Mann from Motley Fool Asset Management to explore the mechanics of momentum investing. Th
Key takeaways
- Momentum investing tracks behavioral anomalies where certain parts of the market outperform their usual norms.
- The 'Noah Principle' illustrates the difficulty investors face when trying to prepare for major market shifts before they are obvious.
Main topics
- Momentum vs. Value Investing
- AI and Market Herding
Notable quotes
Price is the ultimate factor.
Conclusion
The episode highlights that while market cycles and technological shif
Transcript preview
Speaker 1 (0:00) Today's Animal Spirits Talk Your Book is brought to you by The Motley Fool Asset Management. Go to fooletfs.com to learn more about all The Motley Fool's various strategies and ETFs. That's Motley Fool Asset Management, fooletfs.com. Speaker 2 (0:13) Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Speaker 3 (0:43) Welcome to Animal Sports with Michael and Ben. On today's show, we spoke with Bill Mann from Motley Fool Asset Management. Speaker 1 (0:48) We've talked to him a number of times before. The internet boom the first time was the first really, you know, we had these internet chat rooms, right? Where you could kind of spread information faster. And that whole herding thing has always happened. But it is, it does just seem to go up another level with every new technology we have. Speaker 3 (1:07) Yeah. It Speaker 1 (1:08) started with the chat rooms and then social media came along. and blogging and now AI. I do think that the momentum type behavior, which we're talking about today, a lot of momentum strategies, I do think that stuff is going to just get put on steroids and those cycles are going to be happening way, way faster. Speaker 3 (1:25) One of the things that has become more and more difficult in the modern world is long-term thinking and long-term investing. I think a lot of people are of the mind that, all right, this cycle is going to end at some point, right? We've gone up a lot. We're going to go down a lot. And then that's it. The stock market goes away. Don't you think that that's sort of some people's, I know not literally, but some people think like, all right, when the cycle ends. Yeah. But no, guess what? We're going to be alive. You will be investing God willing for the next 10, 20, 30, 40 years and beyond. Speaker 1 (1:58) People always try to equate investing to some sort of sports analogy. Like what inning are we in? The game just keeps going. That's right. It just, it's a different. kind of game. We're still trying to figure out like, how does this end? What does this mean with AI? And it feels like we're talking in circles in some ways, but I, that's what I like the idea of Bill talked about how they have, they call them passive strategies and they're rules-based. And I think that to me is the, that's how you force yourself to be a long-term investor is you put rules in place and you don't try to let it, you know, because how many people are going to be putting in, Hey, listen. I want to invest in the AI theme, but I want to stay away from the hyperscalers, but I want to avoid companies that are below this level. And how many people are getting spit out those same exact companies to invest in and putting it in? And then how willing are you going to be to stick with one of those stocks that you just, it spits out to you, right? Speaker 3 (2:44) Rules are more important now than ever. I Speaker 1 (2:46) agree. So here's our talk with Bill Mayon. He is the chief investment strategist at Motley Fool Asset Management. Speaker 4 (2:54) Bill, it is great to see you again. Michael, you guys look healthy. You look good. You've got your summer glow. Still got it. Ben's got a mustache. He Speaker 2 (3:02) does. I have Speaker 4 (3:04) to look close when I Speaker 3 (3:05) see it. All right. We are talking about momentum today. And I've used this example a million times, probably with you. When talking about momentum, it seems to be an under-allocated space, at least from the advisor side. I think a lot of advisors... have drunk the value serum. I don't want to use coolie. That's a bad word. Nothing wrong with value. We believe in it. There's a wide acceptance among all sorts of investors, particularly advisors with value. And if you compare the assets and value strategies versus momentum strategies, it valued dwarf momentum. And they really are two sides of the same coin. There's a lot of behavioral anomalies that make the factors persist to the extent that they do. But I think even though there's been an under allocation to momentum compared to value, I think investors have largely come around to the idea that momentum exists, that it is pervasive, especially in a world today where the factor exists because of behavioral anomalies, the way information spreads, and it spreads a lot faster today than it did 40 years ago when it was first discovered or whatever year that was. How do you think the... general investor. I know this is sort of an unfair question. How do you think momentum is understood today? I Speaker 4 (4:19) would love to come up with a better word than momentum for momentum as you think about it as an investing strategy, because it really sounds like Mr. Toad's wild ride. Like you're getting put into the catapult, you know, an Angry Birds type situation. You're getting, you know, slingshot out into space. And what momentum is functionally is. is a way of tracking those behavioral anomalies of what is working in the market. And that doesn't necessarily mean the hottest components of the market. What it means is the parts of the market that are showing outsized performance relative to how they usually perform. So you can end up with a substantial overlap between a value strategy and a momentum strategy, depending on the kinds of markets that you're in. And what's important that is different between momentum and value is that as we know, and people who are dyed in the wool value investors, value investing can have a bad decade or two as we've gone through. And what momentum is doing is taking a little bit of the edge out of putting all of your eggs into that value basket, waiting for it to work with the other understanding that, you know, at some point it will. But in the meantime, why are you not allocating a component of your portfolio to the things that are working within reason? Speaker 1 (5:48) I've often talked about how the fact that in a roundabout way, the S &P 500 is like a momentum strategy, right? The cream rises to the top. You're letting your winners ride. The losers are kind of cutting themselves short. But obviously, that's not the quantitative definition of momentum, right? Like a quant would tell you. I'm curious how you think about, because even with value factors, any type of quantitative strategy, you can slice and dice it in a million ways, right? Certain value factors for large cap stocks will look different because of the rules that are chosen. So how do you think about the 80-20 principle of getting the big stuff right? versus trying to get too much into the nitty gritty, into the weeds and the details and over-optimizing a strategy from minimum that like, it's kind of, or do you just keep it simple? Or like, I'm