Reese on Momentum and Value Working Together

In his latest article for Canada’s Globe and Mail, Validea CEO John Reese says that, while many of history’s greatest investors have been value-focused strategists, momentum can also be a critical part of successful approaches.

“In fact, looking for stocks with good price momentum can be a big boost to returns — particularly during certain market conditions,” Reese writes. “James O’Shaughnessy, one of the gurus upon whose writings I base my Guru Strategies, has researched how the market’s affection for momentum varies over time. … His firm’s research has shown that momentum-type strategies tend to fare well in the second years of bull markets, and that the third year of a bull — which we are now in the middle of — tends to be “much friendlier to trend-following and high-yield strategies than to value.”

Reese says his Validea Canada Guru Strategies — each of which is based on the approach of a different investing great — have borne that out, with the three top-performing guru-based portfolios over the past year or so all including a relative strength criterion.

But Reese also offers a warning: “These and other successful momentum-focused strategies don’t look at relative strength in a vacuum; they use it as part of a broader approach that also examines fundamental and financial criteria. In doing so, they look for stocks that have the wind in their sails for a reason.”

Reese examines three picks with strong momentum that get interest from his guru-based models. Among them: Metro Inc., which gets strong interest from his O’Shaughnessy-inspired approach.