Why putting the investment odds in your favour is so hard

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Combining value and momentum improves the chances of investment success

pointed out the advantages of tilting the odds of investment success in your favour by focusing on company-specific financial measures . Mr. Rothery focused on both value factors, such as a low ratio of share price to earnings per share , and share-price momentum. As was pointed out in the article, combining value and momentum improves the chances of investment success.

When using factors, you are taking an outside view. Instead of looking at a particular business and forecasting its future, you are looking at a very broad range of companies and looking for connections between their financial characteristics and future increases in their stock price.

This approach will not result in outperformance every single year, but over time it has, and likely will in the future. Most importantly, in every given year, and for every given purchase, it tilts the odds in your favour. Just to hammer home how difficult thinking this way is for most people, let’s take another example from everyday life. Your friend Frank buys a lottery ticket. You point out that the purchase was a mistake because the odds were dramatically against him. He replies that either he’ll win or he won’t. And once he knows whether he won, the odds will be irrelevant. Perhaps you instinctively agree with Frank’s view.

 

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