Last Tuesday, after a presentation we held in Charlotte, North Carolina a friend of ours, Derek Hernquist who attended, forwarded us a relevant article written by the guys at Longboard Asset Management. The article has some great data and charts that is further validation of our methodology supporting our Concentrated Momentum Strategy.
The chart from Longboard below is a little outdated but the theme remains today, a majority of gains generated by indexes like the S&P 500 come from a small number of stocks. The numbers are eye opening:
The other significant point to note is the distribution pattern of individual stock performance…it’s anything but normal.
As the chart visually depicts, there’s a large gap between the best and the worst.
Our ranking system gives us the opportunity for exposure to the best and minimizes our potential exposure to the worst. It’s not perfect, but effective.
We credit the effectiveness of our ranking system to the recognition that the best stocks, when it comes to total return, have one thing in common….
They spend a lot of time making new highs.
New highs tend to be found when investors are accumulating shares of a particular stock. This accumulation usually correlates with good things: earnings, revenue, new roll outs, etc. We want to be involved in the stocks making new highs…we want to be involved where there is good news.
Those are the stocks we want to own, not the others.
Our Concentrated Momentum Strategy is a quantitatively driven system. It’s designed to rank stocks based on the behavioral tendencies of buyers and sellers and systematically gain exposure to what’s currently in favor. It’s all an effort to own the best and not the worst.
“It may be that the race is not always to the swift, nor the battle to the strong, but that’s the way to bet.” – Damon Runyon
Check out Longboard’s full article when you can, it’s worth the read. Here is a link: