Matt wrote me a while back about how thinking about Value and Growth lead you to Mean Reversion and Momentum.
I like connections.
Here's the line of reasoning.
Value stocks are priced low by whichever definition you feel like using, but when investing in value stocks you are betting against the pessimism knocking the price down and hope for an uptick.
In a sense, some form of mean reversion results in making you money.
Growth stocks are those which people are optimistic about, investors obviously hope the frothiness continues.
In a sense all four ways of thinking about stocks are connected to each other by frothy optimism and curmudgeonly pessimism.
That is, until I plot monthly returns for the last seven years from the S&P 500 Pure Growth index (check out the PCA tool).
It exhibits massive mean reversion.
The pure growth index includes 100 or so stocks with the highest sales growth, the change in the price to earning ratio and price momentum.
Hold on! Momentum??
Fama & French, for example, rather plainly define growth stocks as anti value stocks, i.e. those with low book to market value. S&P are explicitly linking momentum and growth!
Interestingly, I cannot find this strong mean reversion behaviour in other growth indicies or ETFs.
Ironically, it is however easy to find mean reverting characteristics in any momentum index or ETF you care to mention! Implying the existence of momentum crashes - strong returns followed by hefty falls.
The upshot? Momentum and growth analogies are appealing, but aren't really borne out in a very obvious way by the my cursory survey.
Invest in a growth index, and except for the S&P 500 Pure Growth index, it shouldn't exhibit momentum index characteristics too strongly.