Part Two

Building a Momentum-Based Stock Selection Model

Part One explained why momentum is potentially a sustainable stock selection method. The results discussed use a generic momentum strategy that focuses on forming a portfolio of stocks that are the relatively strongest based on their past 12 months of returns (skipping the last, or most recent month). And while generic momentum works, as the label implies, this form of momentum is rudimentary. In Part Two, we dig further into the research on stock selection momentum and describe how to build quantitative momentum, which is an effective and efficient way to capture the momentum premium. Chapter 5, “The Basics of Building a Momentum Strategy,” outlines the basics of generic momentum investing. Chapter 6, “Maximizing Momentum: The Path Matters,” explains how one can differentiate the generic momentum strategy by analyzing path dependency. Chapter 7, “Momentum Investors Need to Know Their Seasons,” discusses the seasonality component of momentum investing. In Chapter 8, “Quantitative Momentum Beats the Market,” we synthesize the previous findings, detail the Quantitative Momentum strategy, and conduct a detailed analysis of the historical results. Finally, in Chapter 9, “Making Momentum Work in Practice,” we examine how one can make momentum investing work in practice.