often find themselves moving in and out of the market frequently, some-
times incurring heavy transactions costs and trading losses as occurred
in 2000.
The distribution in Figure 17-3 is quite similar to that of a buy-and-
hold investor’s purchasing index puts on the market. As noted in Chap-
ter 15, purchasing index puts are equivalent to buying an insurance
policy on the market, but the buyer must continually pay the premium.
Similarly, the timing strategy involves a large number of small losses
that come from moving in and out of the market, while avoiding most
severe declines.
MOMENTUM INVESTING
Technical analysis can also be used to buy individual stocks. Academic
economists call this momentum investing, and it has received increasing
attention. Momentum strategies, unlike fundamental strategies, rely
purely on past returns, regardless of earnings, dividends, or other valu-
ation criteria. Momentum investors buy stocks that have recently risen
in price and sell stocks that have recently fallen, expecting that the stock
price will, for a time, continue to move in the same direction.
While this may seem at odds with the old maxim of “buy low, sell
high,” there is substantial research to support this “buy-high, sell-
higher” strategy. In 1993, Narasimhan Jegadeesh and Sheridan Titman
found that stocks with the highest 10 percent returns over the past six
months outperformed stocks with the lowest 10 percent returns by
about 1 percent per month over the next six months.13,14Other technical
strategies, such as buying stocks priced near their 52-week high, have
also been shown to be successful.^15
It should be emphasized that these momentum strategies work
only in the short term and should not be part of a long-term strategy. In
the Jegadeesh and Titman study, over half of the excess returns gener-
ated in the first 12 months were lost over the following two years. Over
the longer periods, the advantage of buying “winning” stocks is com-
302 PART 4 Stock Fluctuations in the Short Run
(^13) Narasimhan Jegadeesh and Sheridan Titman, “Returns to Buying Winners and Selling Losers: Im-
plications for Stock Market Efficiency,” Journal of Finance, vol. 48, no. 1 (March 1993), pp. 65–91.
(^14) Moskowitz and Grinblatt have found that much of the success of these strategies is due to the
price momentum in industries rather than of individual stocks. See Tobias Moskowitz and Mark
Grinblatt, “Do Industries Explain Momentum?” Journal of Finance, vol. 54, no. 4 (August 1999), pp.
1249–1290.
(^15) Thomas J. George and Chuan-Yang Hwang, “The 52-Week High and Momentum Investing,” Jour-
nal of Finance, vol. 59, no. 5 (October 2004), pp. 2145–2176.