A serious drawback of momentum investing, someone once observed, is that it stops working.
Last year, that’s what happened to the single-hot-fund strategy. FBR Small Cap, which had risen 28.5% in 2006, rose only 2.3% last year, versus 7.7% for the average diversified no-load fund. (The fund has since changed its name to FBR Focus.)
The newsletter, No-Load Fund Investor, has been publicizing the single-hot-fund strategy since 1991, focusing on diversified no-load funds.
According to back-testing, since 1975 the year’s single-hottest-fund beat the average diversified no-load fund in 21 of the succeeding 31 years. Average gain: 20.9% versus 13.8% for the ADNLF.
Sometimes the single-hot-fund strategy has actually shot out all the lights. In 1998, Transamerica Premier Aggressive Growth rose 54.2%, after enjoying a 84.1% gain. Twentieth Century Growth rose 74.2% in 1978, after a torrid 47.2% year.
Sometimes the hot-fund strategy has failed ignominiously. Vanguard Wagoner Emerging Growth rose 291.1% in 1999 (those were the good old days!), and lost 20.9% the following year, when the ADNLF lost only 3.5%. (Whatever happened to Garrett Van Wagoner? Was it he who planned the invasion of Iraq?)
Reading the list of single-hot-fund choices over the years brings back a host of memories, some of them painful. 44 Wall Street. Mathers. The PBHG funds.
I’ve sometimes actually purchased what the newsletter calls its Persistency of Performance choice. I made money with Fidelity Leveraged Company Stock in 2003, lost money last year with FBR Small Cap.
But don’t denigrate the strategy. There’s a mutual fund that buys hot funds, NAME, and it’s done pretty well, even though Morningstar loathes it.
Granted, the efficient market theorists—are there any of those bozos left?—might argue that the hottest-fund strategy seems successful only because the hottest funds tend to be more risky/volatile than the ADNLF. Oh, well.
This year’s single-hot-fund winner: Ken Heebner’s CGM Focus, which rose an impressive 79.9% last year. He’s an opportunistic investor, making big, daring bets, buying and selling like mad, and sometimes selling stocks short. Last year he was shorting financial-service companies and buying energy, materials, and industrials.
The year 2008, as you just possibly may be aware, has not started out with a bang but a whimper. CGM Focus is down a little.
In an interview I had with Heebner almost 15 years ago, he told me that he was no quant. “I don’t use any of those things. I have seen people draw lines on charts, but none of them make any money.” He also eschews Wall Street research: “Getting investment expertise for commission dollars is not the best option to consider.” Does he try to time the market? “I just look for individual opportunities. Trying to time the market doesn’t work for me.”
In 1973, he left Scudder, Stevens & Clark because of a disagreement with the company’s chief executive, who subscribed to the efficient market hypothesis and wanted Heebner to buy stocks from an approved list. Heebner believed that not all stocks are properly priced.
As I wrote then, “In retrospect, for Scudder to have lost Heebner seems to resemble the Red Sox’s losing Babe Ruth to the Yankees.”
I have a dim memory—actually, these days most of my memories are dim—that I once bought a CGM fund, and it lost money so fast and furiously that I quickly headed for the hills.
Morningstar gives the fund five stars. But its analyst, Michael Herbst, writes, “All told, this fund’s style ad eye on highfliers leaves us uncomfortable. We’re content to watch from afar.”
So I don’t think I’ll put any money into CGM Focus this year. There’s this serious drawback, you see, with the momentum strategy…
Last year, that’s what happened to the single-hot-fund strategy. FBR Small Cap, which had risen 28.5% in 2006, rose only 2.3% last year, versus 7.7% for the average diversified no-load fund. (The fund has since changed its name to FBR Focus.)
The newsletter, No-Load Fund Investor, has been publicizing the single-hot-fund strategy since 1991, focusing on diversified no-load funds.
According to back-testing, since 1975 the year’s single-hottest-fund beat the average diversified no-load fund in 21 of the succeeding 31 years. Average gain: 20.9% versus 13.8% for the ADNLF.
Sometimes the single-hot-fund strategy has actually shot out all the lights. In 1998, Transamerica Premier Aggressive Growth rose 54.2%, after enjoying a 84.1% gain. Twentieth Century Growth rose 74.2% in 1978, after a torrid 47.2% year.
Sometimes the hot-fund strategy has failed ignominiously. Vanguard Wagoner Emerging Growth rose 291.1% in 1999 (those were the good old days!), and lost 20.9% the following year, when the ADNLF lost only 3.5%. (Whatever happened to Garrett Van Wagoner? Was it he who planned the invasion of Iraq?)
Reading the list of single-hot-fund choices over the years brings back a host of memories, some of them painful. 44 Wall Street. Mathers. The PBHG funds.
I’ve sometimes actually purchased what the newsletter calls its Persistency of Performance choice. I made money with Fidelity Leveraged Company Stock in 2003, lost money last year with FBR Small Cap.
But don’t denigrate the strategy. There’s a mutual fund that buys hot funds, NAME, and it’s done pretty well, even though Morningstar loathes it.
Granted, the efficient market theorists—are there any of those bozos left?—might argue that the hottest-fund strategy seems successful only because the hottest funds tend to be more risky/volatile than the ADNLF. Oh, well.
This year’s single-hot-fund winner: Ken Heebner’s CGM Focus, which rose an impressive 79.9% last year. He’s an opportunistic investor, making big, daring bets, buying and selling like mad, and sometimes selling stocks short. Last year he was shorting financial-service companies and buying energy, materials, and industrials.
The year 2008, as you just possibly may be aware, has not started out with a bang but a whimper. CGM Focus is down a little.
In an interview I had with Heebner almost 15 years ago, he told me that he was no quant. “I don’t use any of those things. I have seen people draw lines on charts, but none of them make any money.” He also eschews Wall Street research: “Getting investment expertise for commission dollars is not the best option to consider.” Does he try to time the market? “I just look for individual opportunities. Trying to time the market doesn’t work for me.”
In 1973, he left Scudder, Stevens & Clark because of a disagreement with the company’s chief executive, who subscribed to the efficient market hypothesis and wanted Heebner to buy stocks from an approved list. Heebner believed that not all stocks are properly priced.
As I wrote then, “In retrospect, for Scudder to have lost Heebner seems to resemble the Red Sox’s losing Babe Ruth to the Yankees.”
I have a dim memory—actually, these days most of my memories are dim—that I once bought a CGM fund, and it lost money so fast and furiously that I quickly headed for the hills.
Morningstar gives the fund five stars. But its analyst, Michael Herbst, writes, “All told, this fund’s style ad eye on highfliers leaves us uncomfortable. We’re content to watch from afar.”
So I don’t think I’ll put any money into CGM Focus this year. There’s this serious drawback, you see, with the momentum strategy…
