Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 117

Momentum of winning and losing share prices

In the spirit of recognising that there are many different ways to pick stocks, a year ago I wrote an article, Stock market winners versus losers, on using a basic momentum strategy to select stocks. The premise went as follows: academic researchers have found that portfolios of recent outperformers did better than portfolios of recent underperformers. So a long short strategy constructed this way should generate a positive return. We tested this approach in the Australian marketplace and found what appears to be a volatile but high performing strategy. How did this strategy perform in the most recent financial year?

2014-15 financial year performance

A brief refresher on the strategy:

  • At the start of each financial year we hypothetically go long an equally weighted portfolio of the previous financial year’s top 10 performing stocks on the ASX 200
  • We hypothetically also short an equally weighted portfolio of the previous financial year’s worst 10 performing stocks on the ASX 200
  • This portfolio is held untouched for the subsequent financial year (i.e. a 12 month holding period).

The table below lists stocks we would have held, long and short, during the previous financial year (2014 / 2015), based on their performance over the previous 12 months, along with their subsequent performance.

Using the table, if we subtract the short performance (-7%) from the long performance (+10%) we end up with a total performance of 17%. The last financial year has been another solid year of performance for this strategy; a little less than the long term average. The chart below presents the updated track record (now 11 years).

Data: Acadian Asset Management (Australia) Limited

The performance numbers above only focus on the active return piece and leave out cash returns, stock borrowing fees and transaction costs (in theory if you have long and short positions of the same dollar amount then you have 100% of the portfolio earning cash returns).

Digging deeper into the theory

This strategy is a simple one. In fact it catches two known theories in one strategy. First there is the cross-sectional momentum strategy between individual stocks, first identified in 1993 by academics Narasimhan Jegadeesh and Sheridan Titman (their paper was titled “Returns to buying winners and selling losers: implications for stock market efficiency”). However the strategy does not control for sector bets (nor did that of Jegadeesh and Titman) and so we are potentially exposed to a cross-sectional momentum strategy between industries. This has been shown to explain much of the performance of the individual stock effects described above. This was identified by Tobias Moskowitz and Mark Grinblatt in their paper titled “Do Industries Explain Momentum?”.

In practice …

In practice it is unlikely that we would see a strategy like this offered as an investment fund, since:

  • The high volatility of the strategy may make it unpalatable
  • The ability to borrow underperforming stocks may prove difficult and costly.

However in practice we find momentum is a strategy commonly applied by many fund managers, typically those who adopt a quantitative approach. Specifically most fund managers would control the size of the sector bets, hence ruling out the simple strategy presented here. Nonetheless many quant managers use momentum as an indicator of performance for stocks and sectors. It would commonly form part of a suite of signals; indeed I have never seen a fund manager offer a momentum-only stock strategy.


As stated last year: I am not recommending you replicate this ‘strategy’ – I wouldn’t myself. And as per last year I don’t tell you the current positions such a portfolio would be holding – you have to do your own homework! The point of this article is to remind you that there are many different ways to pick stocks. Some are based on company analysis, some are technical, and some are behavioural. You need to pick out an approach that you believe you can execute well, understand  its strengths and weaknesses and the markets in which it will work well and in which it may struggle.


David Bell is Chief Investment Officer at Mine Wealth + Wellbeing (formerly Auscoal Super). He is also working towards a PhD at University of NSW. This article is for general education purposes only and does not consider the personal circumstances of any investor.



Social media’s impact is changing markets

Why caution is needed in Aussie small companies

Is currency exposure an unwanted risk or source of returns?


Most viewed in recent weeks

A tonic for turbulent times: my nine tips for investing

Investing is often portrayed as unapproachably complex. Can it be distilled into nine tips? An economist with 35 years of experience through numerous market cycles and events has given it a shot.

Rival standard for savings and incomes in retirement

A new standard argues the majority of Australians will never achieve the ASFA 'comfortable' level of retirement savings and it amounts to 'fearmongering' by vested interests. If comfortable is aspirational, so be it.

Dalio v Marks is common sense v uncommon sense

Billionaire fund manager standoff: Ray Dalio thinks investing is common sense and markets are simple, while Howard Marks says complex and convoluted 'second-level' thinking is needed for superior returns.

Welcome to Firstlinks Edition 467

Fund manager reports for last financial year are drifting into client mailboxes, and many of the results are disappointing. With some funds giving back their 2021 gains, why did they not reduce their exposure to hot stocks when faced with rising inflation and rates?

  • 21 July 2022

Welcome to Firstlinks Edition 466 with weekend update

Heard the word, cakeism? As in, 'having your cake and eating it too'. The Reserve Bank wants to simultaneously fight inflation by taking away spending power, while not driving the economy into a recession. If you want to help, stop buying stuff.

  • 14 July 2022

Welcome to Firstlinks Edition 465 with weekend update

Many thanks for the thousands of revealing comments in our survey on retirement experiences. We discuss the full results. And with the ASX200 down 10%, the US S&P500 off 20% and bond prices tanking, each investor faces the new financial year deciding whether to sit, sell or invest more.

  • 7 July 2022

Latest Updates

Financial planning

Five charts show predicaments facing financial advice

The number of financial advisers in Australia has almost halved at a time of greater need than ever. What has happened to the industry and its clients as yet another Quality of Advice Review takes place?


House price doomsayers: Could housing prices really fall by 20%?

Why do house prices move in an up-and-flat pattern rather than up-and-down like shares? When house prices start to fall, supply reduces to create a new equilibrium, rather than needing even more price reductions.

Latest from Morningstar

Why I’m not ready for an SMSF

SMSFs are increasing in popularity among younger investors, drawn by the investment control and fixed costs. But until a sufficient balance is achieved, it may be better to stay with a large fund.

Investment strategies

Six ways to take a ‘private equity’ approach in listed markets

By taking a private equity approach to investing in the public equity markets in this difficult market, investors can harness the 'best of both worlds' and still make superior returns over the long term.

Investment strategies

How to avoid being a bad investor

It's tough to become the 'best' investor in the world, but we can certainly avoid being the 'worst'. Here are graphical examples of some long-term principles to adopt, including the difficulty of timing the market.

Financial planning

The case for closing the financial gender gap

While the gender pay gap is slowly improving in the workplace, ATO data shows Australian men aged 55-59 average $50,000 more in super than women of the same age. Financial advisers have a role to play.


Three opportunities in property in Australia and APAC

Rising interest rates and occupancy threats have reduced the share prices of many property companies and trusts, but the selling underestimates the strong pockets of demand and robust earnings from good tenants.



© 2022 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.