Dual Momentum Investing

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Gary Antonacci

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 Dual Momentum Investing
Maximize Returns and Minimize Risk with
Momentum Investing
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About the book
In "Dual Momentum Investing," Gary Antonacci presents a
groundbreaking investment strategy that combines U.S. and
global stock indices with aggregate bond indices, significantly
enhancing returns while minimizing risk. Drawing from over
30 years of investment expertise, Antonacci reveals how a
momentum-driven approach has historically generated returns
nearly double that of the stock market over the past four
decades, all while effectively sidestepping major market
downturns. This well-researched methodology focuses on
identifying shifts in relative strength and market trends,
empowering investors with the tools necessary for sustained
success. As the founder of Portfolio Management Consultants
and a thought leader in asset allocation and advanced
momentum strategies, Antonacci offers invaluable insights for
navigating today’s evolving financial landscape.

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About the author
Gary Antonacci is a recognized authority in the field of
investment strategy, particularly known for his innovative
approach to combining momentum and trend-following
techniques in financial markets. With a background in both
finance and economics, Antonacci has dedicated his career to
researching and developing systematic investing strategies that
leverage empirical evidence to enhance returns and manage
risk. He is the founder of Optimal Momentum, a firm that
provides insights into dual momentum investing, a method he
meticulously articulates in his acclaimed book, “Dual
Momentum Investing.” His work has garnered attention from
institutional investors and retail traders alike, establishing him
as a thought leader in the pursuit of effective and disciplined
investing practices.

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Summary Content List
Chapter 1 : World’s First Index Fund

Chapter 2 : What Goes Up … Stays Up

Chapter 3 : Modern Portfolio Theory Principles and Practices

Chapter 4 : Rational and Not-So-Rational Explanations of

Momentum

Chapter 5 : Asset Selection: The Good, the Bad, and the Ugly

Chapter 6 : Smart Beta and Other Urban Legends

Chapter 7 : Measuring and Managing Risk

Chapter 8 : Global Equities Momentum

Chapter 9 : Mo’ Better Momentum

Chapter 10 : Final Thoughts

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 Chapter 1 Summary : World’s First
Index Fund

Section Summary

INTRODUCTION Gary Antonacci reveals that the first index fund's origin is different from the commonly credited
1971 story involving John McQuown and Bill Fouse, based on his experience in 1976.

DISCOVERY AT Antonacci learns about an unconventional investment strategy from Dee Topol, who randomly
SMITH BARNEY selected stocks with "U.S." and "American" in their names and outperformed professional
managers.

THE STRATEGY Dee's approach was effective due to low costs, lack of emotional decisions, and an unknowingly
diversified portfolio, resembling the first index fund by avoiding common biases.

LESSONS LEARNED Key insights include: minimizing costs boosts returns, broad diversification mitigates risk, and
consistently beating the market is tough; replicating market returns may be better.

REFLECTION ON Antonacci decided to leave brokerage since high costs placed an unnecessary burden on investors.
PROFESSIONALISM

EFFICIENT The chapter discusses EMH, which claims stock prices reflect all information, making market
MARKETS outperformance almost impossible, including historical viewpoints from industry pioneers.
HYPOTHESIS (EMH)

CHALLENGES TO Antonacci questions how successful investors like Warren Buffett can exist if EMH is accurate,
EMH examining stock price movement patterns against academic theories.

MOMENTUM The emergence of behavioral finance in the 1990s highlighted momentum as a significant
ANOMALY phenomenon, revealing how emotions lead to predictable price changes challenging EMH.

CONCLUSION Antonacci plans to integrate insights from academic momentum research with his unique strategies
in upcoming chapters to help readers utilize momentum for better investment outcomes.

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CHAPTER 1: WORLD'S FIRST INDEX FUND

INTRODUCTION

John McQuown and Bill Fouse are often credited with

starting the first index fund in 1971, but Gary Antonacci
reveals a different origin story from his experience in 1976 at
Smith Barney & Co.

DISCOVERY AT SMITH BARNEY

During a meeting with Bob Topol, a top OTC market maker,

Antonacci was introduced to the unconventional investment
strategy of Topol's wife, Dee. She created a portfolio by
randomly selecting stocks with "U.S." and "American" in
their names, demonstrating an unexpected success in
outperforming professional managers.

THE STRATEGY

Dee's success was attributed to low transaction costs, lack of

emotional decision-making and management fees, and an

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unwittingly diversified portfolio. Her strategy resembled the
first index fund, as it avoided biases common in other
investment styles.

LESSONS LEARNED

Antonacci realized several key lessons from Dee’s approach:

- Minimizing costs enhances returns.
- Broad diversification across various factors reduces risk.
- Beating the market consistently is difficult; replicating
market returns may be wise.

REFLECTION ON PROFESSIONALISM

Considering the implications of his discoveries, Antonacci

decided to leave brokerage, finding it unwise to burden
investors with high costs.

EFFICIENT MARKETS HYPOTHESIS (EMH)

The chapter discusses the prevalent belief in EMH, positing

that stock prices reflect all available information, making it
nearly impossible to outperform the market. Various
historical perspectives, including those from Charles Dow

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and Louis Bachelier, are explored.

CHALLENGES TO EMH

As practitioners like Warren Buffett succeeded in the market,

Antonacci wondered how outperformance could exist if
EMH held true. He analyzed patterns in stock price
movements, contrasting academic beliefs with practical
outcomes.

MOMENTUM ANOMALY

With the rise of behavioral finance in the 1990s, the concept

of momentum gained traction. Researchers observed that
human emotions could lead to predictable price deviations,
challenging the EMH and revealing momentum as a
significant phenomenon.

CONCLUSION

In the subsequent chapters, Antonacci plans to present a

method combining insights from academic momentum
research with his unique ideas, showing how to effectively
leverage momentum in investment strategies. The aim is to

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equip readers with knowledge and practical techniques for
harnessing momentum for better investment outcomes.

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Critical Thinking
Key Point:The origins of indexing and its
implications challenge traditional investment beliefs.
Critical Interpretation:Antonacci's revelation of an
alternative origin story for index funds, stemming from
an unconventional investment strategy of Dee Topol,
undermines the widely accepted narrative that credits
early creators like McQuown and Fouse. By
emphasizing that her simple, cost-effective selection
approach outperformed professional managers, he calls
into question not only the efficiency of active
management but also the Efficient Market Hypothesis
(EMH) itself. This serves as a critical reflection on
investment norms, urging readers to remain skeptical of
conventional wisdom that suggests stock prices fully
incorporate all available information, which authors like
Burton Malkiel assert in 'A Random Walk Down Wall
Street'. Keeping an open mind to alternative strategies
could lead to more favorable investment outcomes,
challenging the dominance of traditional thought.

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 Chapter 2 Summary : What Goes Up …
Stays Up

Section Summary

Momentum Momentum is the tendency for investments to continue performing well if they have done well in the past,
Defined and vice versa for underperforming assets.

Classical Ideas The concept of momentum dates back to Newton and is echoed by investors like David Ricardo,
emphasizing the importance of letting profits run.

Momentum in Traders like Jesse Livermore and Richard Wyckoff promoted buying stocks at new highs and strong
the Early 20th stocks in leading sectors, further supported by George Seaman's relative strength investing.
Century

Mid-20th In the 1950s, George Chestnutt and others reinforced the strategy of buying market leaders for better
Century returns, highlighted by the CAN SLIM method by William O'Neil.
Momentum

Modern Research from the 1960s onwards, particularly by Jegadeesh and Titman, showed that past winners tend
Momentum to outperform, leading to the systematic application of momentum strategies.

Seminal Studies by Jegadeesh and Titman showed that buying winning stocks leads to ongoing gains, affirming
Momentum momentum's performance across various asset classes.
Research

Current Applied Modern portfolios implement momentum strategies, but they come with higher transaction costs and may
Momentum increase portfolio risk, as seen with firms like Dorsey, Wright & Associates and AQR Capital
Management.

Conclusion The evolution of momentum investing combines historical insights and modern research, setting the stage
for the exploration of relative and absolute momentum in future chapters.

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CHAPTER 2: WHAT GOES UP... STAYS UP

Momentum Defined

Momentum is the tendency of investments to persist in their

performance; assets that have performed well will likely
continue to do well, while those that haven't will likely
continue to underperform.

Classical Ideas

The concept of momentum has historical roots, starting with

Newton’s first law of motion. David Ricardo emphasized
momentum in investing by advising to "cut your losses; let
your profits run on." Many notable figures like Jesse
Livermore and Richard Wyckoff elaborated on momentum
through trend-following strategies in the early 20th century.

Momentum in the Early 20th Century

Momentum strategies were championed by traders like

Livermore, who focused on buying stocks at new highs, and
Wyckoff, who advocated buying strong stocks in leading

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sectors. George Seaman's recommendations in the late 1930s
on relative strength investing continued to propagate these
ideas, leading to observable superior returns for
high-performing stocks.

Mid-20th Century Momentum

In the 1950s, George Chestnutt highlighted that buying

leaders in market advances yields better returns than seeking
underperforming stocks. Influential figures like Jack Dreyfus
and William O'Neil reinforced these principles, with the
latter’s CAN SLIM method focusing on buying strong
performers and selling weak ones.

Modern Momentum

The 1960s and beyond saw pivotal research on momentum,

most notably by Robert A. Levy and the groundbreaking
work of Jegadeesh and Titman in the 1990s, which
demonstrated that past winners tend to continue
outperforming. This research catalyzed an interest in the
systematic application of momentum strategies in finance.

Seminal Momentum Research

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Jegadeesh and Titman’s studies demonstrated that buying
winning stocks over specific periods resulted in continued
gains. Subsequent research expanded upon their work,
reinforcing momentum's persistent performance across
various asset classes.

Current Applied Momentum

Modern portfolios have incorporated momentum strategies,

with firms like Dorsey, Wright & Associates and AQR
Capital Management creating funds based on momentum
principles. However, while these strategies can enhance
returns, they also incur higher transaction costs and may
increase overall portfolio risk.

Conclusion

The evolution of momentum investing reflects a blend of

historical wisdom and modern research, establishing
momentum as a powerful investment strategy. The
combination of relative and absolute momentum will be
explored further in subsequent chapters for a comprehensive
investment model.

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Example
Key Point:Recognizing the Power of Momentum
Example:Imagine you decide to invest in a technology
stock that has consistently risen over the past few
months; you witness its rapid growth, and every week, it
seems to break through new price barriers, compelling
you to consider why it keeps going up. You remember
the lesson on momentum: investments like this often
keep performing well as they build positive sentiment
and attract more buyers. With conviction, you commit
to this philosophy, knowing that by choosing assets with
strong past performance, you’re more likely to ride the
wave of returns instead of risking your money on
underperformers.

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Critical Thinking
Key Point:The efficacy of momentum investing
strategies is widely accepted; however, skepticism
persists regarding their consistency and
sustainability.
Critical Interpretation:While momentum investing is
praised for historically yielding superior returns as
highlighted by Antonacci, one must critically evaluate
whether past performance guarantees future success.
Notably, the financial crisis of 2008 raised questions
about momentum strategies, revealing how rapid market
shifts can disrupt assumed continuities in asset
performance. Critics, such as Fama and French, have
challenged the momentum phenomenon, suggesting that
it may not persist under all market conditions. Thus,
while momentum may offer a compelling investment
framework, investors should remain cautious and
consider alternative viewpoints and market analyses,
especially in volatile environments.

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Chapter 3 Summary : Modern Portfolio
Theory Principles and Practices

CHAPTER 3: MODERN PORTFOLIO THEORY

PRINCIPLES AND PRACTICES

Introduction

This chapter provides an overview of modern finance and its

connection to dual momentum, emphasizing the importance
of skepticism towards experts in the field of economics.

Markowitz Mean-Variance Optimization

Harry Markowitz introduced mean-variance optimization

(MVO) in 1952 to create efficient portfolios that maximize
expected returns for given levels of risk. Despite its
theoretical elegance, MVO suffers from instability and
sensitivity to inputs, often leading to unreliable results and
extreme portfolio weights. Practical alternatives, like equal
portfolio weighting, are often more effective.

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Capital Asset Pricing Model (CAPM)

CAPM developed in the 1960s provides a simplified way to

analyze risk and expected return by relating an asset’s excess
return to the market’s excess return via a linear regression.
However, empirical tests revealed its shortcomings, as
high-beta portfolios did not yield anticipated returns.
Subsequent advancements, like Fama and French's
three-factor model, attempted to address CAPM's limitations
by incorporating additional risk factors, yet the reliability of
these models remained questionable.

Theoretical Issues in Modern Finance

Modern finance rests on flawed assumptions about market

prices and their distributions. Mandelbrot challenged the
conventional models, highlighting the real-world behavior of
price movements and their uncorrelated volatility,
emphasizing that extreme price drops occur more frequently
than traditional models predict.
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Black-Scholes Option Pricing Model

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Chapter 4 Summary : Rational and
Not-So-Rational Explanations of
Momentum

RATIONAL AND NOT-SO-RATIONAL

EXPLANATIONS OF MOMENTUM

In this chapter, the author addresses the effectiveness of

momentum in investing and explores potential explanations
for its success. Academics generally acknowledge that
momentum works well, but the reasons behind its efficacy
remain elusive.

Why Momentum Works

There are two primary schools of thought regarding the

reasons for momentum's success:
1.
Rational Explanation
: Momentum profits may be seen as compensation for taking
on greater risk, aligning with traditional efficient market
theories. However, known risk factors do not adequately

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explain momentum profits, indicating the need for new risk
factors.
2.
Behavioral Explanation
: Alternatively, some argue that momentum profits result
from irrational investor behavior, which tends to be
systematic and predictable. Behavioral finance suggests that
human actions, influenced by biases, drive market prices
rather than pure information efficiency.

Rational Basis for Momentum

Research has attempted to explain momentum through

risk-based models, including:
- Studies suggesting variations in expected returns account
for momentum profits.
- Additional factors like macroeconomic variables or
industry-specific risks have also been proposed.
- Nevertheless, various researchers have challenged these
models, suggesting they do not sufficiently explain
momentum phenomena.

Behavioral Basis for Momentum

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Behavioral finance suggests that several biases contribute to
momentum, including:
-
Anchoring and Underreaction
: Investors may resist adjusting to new information, leading
to price inertia.
-
Confirmation Bias
: This bias causes investors to favor information that supports
their existing beliefs, leading to trend continuation.
-
Herding and Feedback Trading
: Traders following trends can cause overreactions,
contributing to momentum.
-
Disposition Effect
: Investors often sell winning stocks too early and hold onto
losing investments too long, affecting price discovery.
The chapter emphasizes how these biases complement each
other to create a strong momentum effect in the market.

Putting It All Together

The chapter concludes by illustrating that the combination of

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emotional biases leads to initial underreaction followed by
overreaction in the market. While it may be difficult to cite
precise reasons for momentum, numerous logical
explanations underscore its persistence. Understanding these
underlying factors gives investors tools to mitigate adverse
behaviors and utilize momentum to their advantage. The text
invites readers to look towards practical applications in the
subsequent chapters.

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Example
Key Point:The Role of Emotional Biases in
Momentum Investing
Example:Imagine you're tracking stocks that have been
rising steadily. You notice your neighbor, an avid
investor, keeps buying more shares, reinforcing your
belief that these stocks will keep climbing. This
influence of herding behavior captures how emotional
biases drive you to buy into the momentum,
demonstrating that irrational investor behavior can
significantly impact stock trends, often leading to both
underreaction and overreaction in the market.

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Critical Thinking
Key Point:Rational versus Behavioral Explanations
of Momentum Investing
Critical Interpretation:The chapter discusses the dual
perspectives of rational and behavioral explanations for
momentum investing, indicating that while the rational
explanation aligns with traditional market theories, it is
often insufficient to fully account for momentum
phenomena. This contention raises important questions
about the extent to which market players behave
rationally, suggesting that emotional biases may play a
more significant role than previously recognized. The
insights challenge the reader to consider that if investor
behavior is heavily influenced by biases, then relying
solely on traditional risk assessments may lead to
suboptimal investment strategies. Contributions from
behavioral finance research, such as those highlighted in
works by Daniel Kahneman and Richard Thaler, provide
additional context for understanding these biases,
advocating for a broader approach that combines both
rational and irrational elements in risk assessment.

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Chapter 5 Summary : Asset Selection:
The Good, the Bad, and the Ugly

Chapter 5: Asset Selection: The Good, The Bad, and

The Ugly

Introduction to Diversification

- Warren Buffett highlights diversification as a safeguard

against ignorance, emphasizing that it is primarily needed
when investors lack understanding.

Investment Goals

- Investors aim for a high risk premium while minimizing tail

risk or drawdowns. Over time, equities have outperformed
other asset classes, with U.S. equities yielding a 6.5% risk
premium compared to 4.5% for non-U.S. equities from 1900
to 2013.

Bonds vs. Equities

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- Long-term government bonds had only a 1.9% annualized
real return, illustrating that equities generally outperform
bonds. Notably, bonds have become less ideal for
diversifying stock portfolios due to periods of positive
correlation with equities.

Historical Trends in Bonds

- A lack of returns prompted skepticism about long-term

bond investments since rising yields can significantly reduce
bond values. John Bogle points out that current bond yields
only predict future returns, which are disappointing.

Risk Management with Momentum Strategies

- Using absolute and dual momentum strategies can help

manage risk without relying heavily on bonds, optimizing the
allocation based on market conditions.

Diversification's Efficacy

- The concept of diversification is well-established, but its

effectiveness diminishes during market stress when

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correlations rise. International diversification through foreign
stocks and emerging markets presents higher risks and
increased correlations.

Alternative Assets and Their Effects

- Commodities, managed futures, hedge funds, and private

equity are critiqued for not offering the anticipated returns or
risk reductions. These assets often have high fees and
complexities that negate their benefits.

Managed Futures and Hedge Funds

- Managed futures and hedge funds have underperformed in

recent years, with many failing to justify their high fees.
Most hedge funds do not provide measurable alpha,
emphasizing the diminishing value of this investment
strategy.

Individual Investor Behavior

- Studies show individual investors often underperform

market averages due to poor timing and emotional trading
decisions. They frequently trade too much and lack

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diversification in their portfolios.

Conclusion on Investment Strategy

- The author's cumulative insights suggest that passive,

low-cost index funds and a disciplined investment approach
offer better long-term success compared to actively managed
alternatives. Properly selected equities can significantly
enhance investment returns without excessive costs.

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Chapter 6 Summary : Smart Beta and
Other Urban Legends

SMART BETA AND OTHER URBAN LEGENDS

Introduction to Smart Beta

- The chapter discusses the focus on stocks and bonds in the

context of dual momentum investing and questions whether
traditional capitalization-weighted indexes are the best
method for stock participation.
- "Smart beta" is introduced as a term for rules-based
strategies that do not adhere to conventional capitalization
weights, aiming to provide better risk-return trade-offs.

Characteristics and Performance of Smart Beta

- Smart beta strategies include fundamentally weighted

indexes and equal-weighted funds, developed in response to
market crises that heightened the interest in diversification
and risk management.

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- Despite growing popularity, criticisms arise, indicating
smart beta strategies may be simply active management
without superior performance compared to traditional
methods and often involve higher costs.

Replication of Smart Beta

- Smart beta can often be replicated at lower costs with

factor-based ETFs. Examples are provided, contrasting the
performance and costs of smart beta ETFs with conventional
options.

Critical Analysis of Smart Beta's Value

- The chapter introduces skepticism about smart beta

strategies as many are rooted in historical data with limited
backtesting. It stresses that replicating results based solely on
past performance can be misleading.
- Investors should consider logical reasoning, backtesting
robustness, transaction costs, volatility, and liquidity when
evaluating nontraditional strategies.
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The Role of Size and Value in Smart Beta

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Chapter 7 Summary : Measuring and
Managing Risk

CHAPTER 7: MEASURING AND MANAGING

RISK

This chapter discusses the significant underperformance of

average investors in popular investment vehicles like mutual
funds and index funds, primarily due to poor timing
decisions exacerbated by emotional responses. It highlights
the need for a disciplined and quantitative approach to
investing, emphasizing absolute momentum as a tool to
manage risk effectively.

UNDERSTANDING ABSOLUTE MOMENTUM

Absolute momentum focuses on an asset's own past

performance to predict future returns, contrasting with
relative momentum, which compares an asset with peers. By
measuring an asset's excess return against Treasury bills,
absolute momentum identifies whether an asset is in an
upward or downward trend. This method protects investors

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by allowing them to exit losing positions early in bear
markets, serving as a defensive strategy.

CHARACTERISTICS OF ABSOLUTE
MOMENTUM

The chapter outlines absolute momentum as a

trend-following strategy that aligns with principles of risk
management. Research indicates that it consistently provides
higher risk-adjusted returns and reduces downside
vulnerability compared to relative momentum. Moreover, it
enhances portfolio diversification by retaining all assets as
long as their trends remain positive.

DUAL MOMENTUM—THE BEST OF BOTH

WORLDS

Combining relative and absolute momentum provides the

advantages of selecting the best-performing asset based on
past performance while filtering for current trends. This
integrated approach helps maintain alignment with market
trends and reduces potential losses.

ALPHA AND SHARPE RATIO

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The chapter explains the use of alpha and Sharpe ratios in
evaluating investment strategies. Alpha measures
performance relative to benchmarks, while the Sharpe ratio
assesses return per unit of risk. It notes limitations of the
Sharpe ratio, particularly its treatment of upside and
downside volatility.

TAIL RISK AND MAXIMUM DRAWDOWN

Addressing the often-neglected tail risk of investment

strategies, the chapter explains how maximum drawdown
indicates potential losses during downturns. It highlights the
importance of using visual aids and maximum drawdown
alongside other metrics for evaluating strategy performance.

AN INTEGRATED APPROACH

The chapter concludes with a call for a comprehensive

evaluation of investment strategies based on various
performance metrics, setting the stage for subsequent
discussions on dual momentum and its full potential for
improved investing outcomes.

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Chapter 8 Summary : Global Equities
Momentum

CHAPTER 8: GLOBAL EQUITIES MOMENTUM

Introduction to Momentum Investing

- Momentum investing is explored, focusing on relative,

absolute, and dual momentum.
- The chapter outlines building a momentum-based
investment portfolio anchored in U.S. stocks, transitioning to
non-U.S. stocks based on relative strength.

Dynamic Asset Allocation

- The dual momentum strategy shifts from static to dynamic

asset allocation, adapting to changing market conditions.
- The integration of global markets leads to the need for a
more flexible allocation strategy due to increased correlations
during market stress.

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Look-Back Period for Momentum

- A 12-month look-back period is recommended for

measuring momentum, balancing performance with portfolio
turnover and costs.
- Broad market indices are preferred for implementing
momentum strategies to minimize transaction costs and
avoid liquidity issues.

Applied Absolute Momentum

- Absolute momentum focuses on maintaining investment in

the S&P 500 if it shows positive excess returns over the past
year, otherwise shifting to bonds.
- This strategy significantly improves returns while reducing
risk metrics.

Applied Relative Momentum

- Relative momentum involves comparing the performance

of U.S. stocks with non-U.S. stocks using the MSCI ACWI
index.
- Results show that non-U.S. stocks typically underperform
relative to U.S. stocks.

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Combining Relative and Absolute Momentum

- Monthly application of absolute momentum to decide

between equities and bonds, along with relative momentum
to select between U.S. and non-U.S. equities.
- This dual approach enhances overall returns while
mitigating risks.

Performance of Global Equities Momentum (GEM)

- Over four decades, GEM demonstrates superior annual

returns with reduced volatility and drawdowns compared to
traditional asset allocations.
- The strategy is characterized by fewer switches and lower
transaction costs, promoting a stable growth profile.

Risk Adjustments and Implementation

- While GEM excels in performance, it also accommodates

varying investor risk profiles through leveraging or bond
combinations.
- The ease of implementation with exchange-traded funds
(ETFs) ensures low operational costs and robust

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management.

Conclusion

- GEM provides a simple, effective, and robust approach to

momentum investing, successfully integrating absolute and
relative momentum strategies.
- Suitable for investors with different risk tolerances, GEM
stands as a versatile tool for stable and enhanced portfolio
performance.

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Example
Key Point:Dynamic Asset Allocation
Example:Imagine you're navigating a fast-changing city
with unpredictable traffic. In this scenario, dynamic
asset allocation is your GPS, constantly recalibrating
your route based on current road conditions. Just like
you would switch routes if a main road is congested,
this approach allows your investment portfolio to shift
between U.S. and non-U.S. stocks depending on market
performance, enhancing your potential returns and
protecting against downturns. By adapting your
investments in real-time, you’re not just following the
crowd; you're making informed, strategic decisions that
align with the latest market trends.

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Chapter 9 Summary : Mo’ Better
Momentum

CHAPTER 9: MO’, BETTER MOMENTUM

Overview of Dual Momentum

- Dual momentum offers higher expected returns with lower

expected risk, as discussed in previous chapters.
- It emphasizes simplicity and directness, relying only on
relative and absolute performance with a fixed look-back
period.

Challenges to Enhancing Momentum

- Altering the established dual momentum strategy poses

risks such as multiple-comparisons hazard and model
overfitting.
- Data-mining can lead to false results, where luck might
erroneously validate alternative strategies due to chance.

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Absolute Momentum

- Historical research supports the effectiveness of 12-month

look-back periods for momentum strategies.
- Attempts to enhance absolute momentum through
alternative methods (e.g., t-statistic based trend
determination) show promise but must remain cautious of
added complexity.

Trend Following Techniques

- Moving averages are popular for price trend analysis. They

have shown efficacy, yet selecting the optimal period poses
potential biases from past data mining.
- Valuation metrics, such as the CAPE ratio, can signal
market timing opportunities but do not guarantee effective
predictions.

Relative Momentum in Practice

- The AQR Momentum Index demonstrates the potential

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of applying Full to
momentum Text and
individual
stocks versus broader market Audio
indices.
- Combining relative strength momentum with value

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Chapter 10 Summary : Final Thoughts

CHAPTER 10: FINAL THOUGHTS

Introduction to Dual Momentum

The author reflects on the journey of creating dual

momentum as a strategy in investing, drawing parallels with
humility in economics and the ineffectiveness of traditional
money management. Quotes from Eugene Fama, Charles
Darwin, and Lao Tzu emphasize the importance of
adaptability and understanding market dynamics. The new
investment strategy promotes a carefree approach to market
fluctuations by following the model.

Old Investment Paradigm

The previous strategy involved naive investing and reliance

on prognosticators, leading to issues like overtrading,
underdiversification, and high fees in active management.
Fixed income investments were emphasized to reduce
volatility, which may not be effective in current

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low-interest-rate conditions. Critics argue that excessive
diversification can dilute returns, further impacting
wealth-building.

New Investment Paradigm

Contrasting the old ways, the dual momentum paradigm

aligns with market forces using straightforward concepts. It
allows investors to focus on equities to capture a higher risk
premium while utilizing fixed income selectively. This
model combines relative strength and absolute momentum,
aiming for better returns with lower risk, while also
mitigating emotional biases in decision-making.

Continuing Effectiveness of Momentum

Momentum has shown consistent outperformance over many

years, but there are concerns about its sustainability as
awareness grows. Behavioral biases and inertia may hinder
widespread adoption of dual momentum, keeping many
investors trading against it, and showcasing the ongoing
superiority of passive investing over active management.

Challenges and Opportunities

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Investors may face periods of underperformance with dual
momentum, which could tempt them to deviate from the
model. The text stresses the need for discipline and patience
in following proven methodologies over personal judgment,
highlighting effectiveness in quantitative models versus
expert opinions.

Conclusion: All Aboard!

The journey of dual momentum investing is likened to a train

ride toward financial success, emphasizing movement with
the market and the advantages of sticking with the dual
momentum approach for long-term gains. The narrative
concludes with a vision of a prosperous journey along the
'Dual Momentum Route,' affirming the importance of
adherence to this investment strategy.

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Best Quotes from Dual Momentum
Investing by Gary Antonacci with Page
Numbers
View on Bookey Website and Generate Beautiful Quote Images

Chapter 1 | Quotes From Pages 29-48

1.Yes, I’ve done well, but would you like to hear
about someone who has done better than me? In
fact, this person has done better in the market
than anyone else I know.
2.Dee has always been very patriotic. So, years ago she
decided to buy all the stocks with ‘U.S.’ or ‘American’ in
their names.
3.It is important to keep costs as low as possible. This is the
easiest way to earn risk-adjusted excess return (alpha).
4.One should diversify broadly, and not just by picking
stocks with different names having similar characteristics.
5.It is not easy to beat the market. Very few investors do.
Replicating the market portfolio may be a good thing.
Chapter 2 | Quotes From Pages 49-70

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1.Cut your losses; let your profits run on.
2.Big money is not in the individual fluctuations, but in
sizing up the entire market and its trend.
3.Prices are never too high to begin buying or too low to
begin selling.
4.What seems too high in price and risky to the majority goes
higher eventually, and what seems low and cheap usually
goes lower.
5.I believe that more money can be made by buying high and
selling at even higher prices.
6.The stocks which historically were among the 10%
strongest appreciated in price by an average of 9.6%, over a
26-week future period.
7.Taking one year as the unit of measurement for the period
1920 to 1935, the tendency is very pronounced for stocks
which have exceeded the median in one year to exceed it
also in the year following.
8.The premier market anomaly is momentum.
Chapter 3 | Quotes From Pages 71-89

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1.The purpose of studying economics is not to
acquire a set of ready-made answers to economic
questions, but to learn to avoid being deceived by
economists.
2.Beware of geeks bearing formulas.
3.It ain’t what we don’t know that gets us in trouble. It’s
what we know for sure that just ain’t so.
4.In the end, a theory is accepted not because it is confirmed
by conventional empirical tests, but because researchers
persuade one another that the theory is correct and relevant.
5.If you are in a market and someone is trying to sell you
something which you don’t understand, you should think
they are selling you a lemon.
6.Mathematics has given economics rigor, but, alas, also
mortis.
7.It’s clear that among the causes of the recent financial
crises was an unjustified faith in rational explanations and
market efficiencies.
8.We can advance by developing radically new theories to

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help us understand what we now see in the data.

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Chapter 4 | Quotes From Pages 90-106
1.A theory is more impressive the greater the
simplicity of its premises, the more different kinds
of things it relates, and the more extended its
range of applicability.
2.So in instead, I will give a number of possible reasons that
may explain why momentum works, even though the
underlying answer is still that we do not exactly know.
3.There are two schools of thought as to why momentum
works. The first is that high momentum profits are
compensation for assuming greater amounts of risk.
4.[...] it was the supporters of efficient markets who kept
trying to find additional risk factors they hoped would
explain momentum on a rational basis.
5.Investors being more sensitive to losses than they are to
gains became known as 'loss aversion.'
6....herding, anchoring/confirmation bias, and the disposition
effect complement each other and can lead to a unified,
behaviorally based concept of momentum-inducing

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 behavior.
7.Keep in mind that when someone asked Richard Thaler
about the choice between accepting the idea of efficient
markets or behavioral finance, his response was, 'It's a
choice between being precisely wrong or vaguely right.'
8.You might also take comfort in the idea that momentum
lets us profit from human behavioral biases instead of
being subject to them in adverse ways.
Chapter 5 | Quotes From Pages 107-148
1.Diversification is protection against ignorance.
Wide diversification is only required when
investors do not understand what they are doing.
2.Over long periods of time, the returns on equities not only
surpassed those on all other financial assets, but were far
safer and more predictable than bond returns when inflation
was taken into account.
3.The average annualized real return after inflation on U.S.
long-term government bonds from 1900 through 2013 was
just 1.9%, considerably less than the 6.5% average

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 annualized real return from U.S. equities during this same
period.
4.Only about half of U.S. households hold equities, including
what they have as retirement assets.
5.By focusing more on the big picture and less on short-term
volatility, one may be able to stay in the markets longer
term and capture this high equity risk premium.
6.Since bonds have performed well over the past 30 years,
many investors may have forgotten that the last bond bear
market lasted all the way from 1946 to 1981.
7.The question then is, should one ever have a permanent
allocation to bonds when absolute (and dual) momentum
can reduce the downside exposure of a stock portfolio?
8.Today’s overemphasis on diversification often leads to
mediocrity and unnecessary expense.
Chapter 6 | Quotes From Pages 149-166
1.The first problem with smart beta is that, like
unicorns, there is no such thing.
2.While low volatility and low beta strategies show some

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 promise in academic tests, the problems of implementation
with respect to portfolio turnover and tracking error may
eliminate much of their advantage.
3.Extrapolating results based on only 15 years of data can be
very dangerous.
4.Dual momentum investors can take comfort in the fact that
momentum has worked well across nearly all types of
equities and all the way back to the year 1801!
5.When the facts change, I change my mind. What do you
do?

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Chapter 7 | Quotes From Pages 167-183
1.We have met the enemy, and he is us.
2.The most important rule in trading is: play great defense,
not great offense.
3.Life itself is based on trends.
4.The goal of trend following is to adhere to Warren Buffett’s
first rule of investing—do not lose money.
5.Absolute momentum is a bet on the continuing serial
correlation of returns.
Chapter 8 | Quotes From Pages 184-205
1.There is a tide in the affairs of men which, when
taken at the flood, leads to fortune.” —William
Shakespeare
2.Our dual momentum approach using both absolute and
relative momentum to manage asset allocation is a major
paradigm shift from what investors usually have done.
3.Simple and effective GEM is not only effective in
providing high and significant risk-adjusted returns, but it
is also parsimonious.

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4.Investors currently use relative momentum much more than
they use absolute momentum. Absolute momentum,
though, with its substantial decrease in volatility and
drawdown and its higher Sharpe ratio, is superior on a
risk-adjusted basis.
5.Our approach is both simple and easy.
6.Not having to recoup bear market losses is what
contributed greatly to GEM’s extraordinary returns.
7.The low-risk profile makes it less likely that investors will
make emotionally based exit decisions at inopportune
times.
8.Dual momentum can take us from naive diversification to a
dynamically adaptive asset allocation approach.
9.Highly optimized methods are often complex, fragile, and
prone to failure.
Chapter 9 | Quotes From Pages 206-234
1.Simplicity is the ultimate sophistication.
—Leonardo da Vinci
2.We saw in the last chapter how dual momentum gives us

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 higher expected returns with lower expected risk.
3.One does not need to experiment extensively to get into
trouble this way.
4.There is a significant value premium based on 28 years of
data.
5.In God we trust; all others bring data.
6.Absolute momentum reduces noise by looking at two
reference points in time.
7.Financial markets are most definitely nonergodic.
8.The statistician W. Edwards Deming once said, 'In God we
trust; all others bring data.'
9.Market timing based on valuation could miss out on all
this.
10.Dual momentum reflects the higher returns and drawdown
reduction of applying absolute momentum to enter and
exit the 11 equally weighted equity sectors.

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Chapter 10 | Quotes From Pages 235-246
1.If economists could manage to get themselves
thought of as humble, competent people on a level
with dentists, that would be splendid.
2.Full-time professionals in other fields, let’s say dentists,
bring a lot to the layman. But, in aggregate, people get
nothing for their money from professional money
managers.
3.It is not the strongest of the species that survives, nor the
most intelligent, but rather the one most adaptable to
change.
4.The best way to manage anything is by making use of its
inherent nature.
5.Bull markets climb a wall of worry. With dual momentum,
that expression instead becomes, ‘Don’t Worry. Be Happy.’
All we have to do is follow our model.
6.Models beat experts 94% of the time.
7.The future has many names. For the weak, it means the
unattainable. For the fearful, it means the unknown. For the

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courageous, it means opportunity.

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Dual Momentum Investing Questions
View on Bookey Website

Chapter 1 | World’s First Index Fund| Q&A

1.Question
What motivated Dee's success in investing according to
Bob Topol?
Answer:Dee's success lay in her low transaction
costs because she bought stocks only once and held
onto them indefinitely. This strategy also avoided
emotional decision-making tied to market
performance, and she saved on management fees, as
she managed her own portfolio without brokers or
managers.

2.Question
How did Dee's investment portfolio differ from most
investors at the time?
Answer:Unlike most investors, Dee had a well-diversified
portfolio without a specific investment bias. Her stocks
included a broad range across company size and type,

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making her portfolio more balanced than the typical market
portfolio which leaned heavily toward large-cap and growth
stocks.

3.Question
What life-changing realization did the author have about
the market after learning about Dee's approach?
Answer:The author learned that keeping costs low and
diversifying broadly are crucial for successful investing. He
recognized that replicating the market portfolio could be a
reasonable and effective investment strategy, rather than
actively trying to beat it.

4.Question
What shift occurred in the perception of efficient market
hypothesis (EMH) during the 1990s?
Answer:In the 1990s, behavioral finance challenged the
assumptions of EMH, suggesting that investors do not
always act rationally, leading to price disparities. Academic
interest in momentum strategies grew, highlighting that
systematic anomalies could exist in the market.

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5.Question
What were the two options the author felt he had after
realizing the limitations of active investment
management?
Answer:The author saw two options: become an efficient
marketeer, which he felt was silly, or become like Don
Quixote, trying to challenge the prevailing notions of
efficient market theory, thus embarking on a less
conventional path in investment management.

6.Question
What does the author suggest as a key approach in his
investment philosophy inspired by Dee's method?
Answer:The author emphasizes a simple and practical
momentum-based model for investing, which blends
academic momentum research with his own ideas aimed at
generating exceptional profits while minimizing risk.

7.Question
What was Dee's unique strategy that led to her
outperforming many professional money managers?
Answer:Dee's unique strategy involved selecting stocks

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based on names that included 'U.S.' or 'American' and later
buying stocks of companies with 'General' in their names.
This naive approach led her to create a diversified portfolio
that mimicked the market.

8.Question
What significant challenges does the author identify for
professionals seeking to beat the market?
Answer:He notes the difficulties of maintaining low costs
and high diversification while faced with the market's
efficiency, emphasizing that successfully beating the market
is a rare achievement that requires identifying genuine
anomalies.

9.Question
How did the author’s experiences in commodities trading
influence his perception of market efficiency?
Answer:His experience trading commodities verified for him
that markets could indeed present inefficiencies ripe for
exploitation, reinforcing his rejection of the notion that all
markets are perfectly efficient.

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10.Question
Why did the author highlight the momentum anomaly as
a significant area of study?
Answer:The momentum anomaly intrigued the academic
community because it contradicted the efficient market
hypothesis, showcasing that irrational behavior among
investors could create predictable price movements, thus
allowing for potential profit through strategic investment.
Chapter 2 | What Goes Up … Stays Up| Q&A
1.Question
What is momentum investing and how does it function?
Answer:Momentum investing refers to the tendency
of investments to persist in their performance,
meaning that assets which have performed well in
the past are likely to continue performing well, while
those that have performed poorly are expected to
continue their poor performance. This principle is
rooted in the laws of physics, notably Newton's first
law of motion, which states that an object in motion

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tends to stay in motion unless acted upon by an
outside force. In the context of investing, this can be
understood as a market phenomenon where
trends—whether upward or downward—tend to
persist.

2.Question
How have historical figures contributed to momentum
investing?
Answer:Historical figures like David Ricardo emphasized the
principle of cutting losses and letting profits run, which is
fundamental to momentum investing. Trader Jesse Livermore
promoted buying stocks that were making new highs, stating
that 'prices are never too high to begin buying or too low to
begin selling.' These principles have been echoed by
numerous investors over the centuries, establishing a legacy
of momentum strategies.

3.Question
What is the significance of the research conducted by
Cowles and Jones in 1937?

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Answer:The research by Cowles and Jones marked the first
scientific study into momentum. They analyzed stock
performance and found that stocks which had performed well
the previous year tended to continue performing well,
highlighting the predictive power of historical performance
for future outcomes. Their findings laid the groundwork for
modern momentum strategies, proving that past winners
generally continue to win.

4.Question
What common themes did successful momentum
investors share in their strategies?
Answer:Successful momentum investors like Jack Dreyfus
and William O'Neil often emphasized investing in strong
stocks during upward trends while avoiding weaker stocks.
Their strategies advised buying leading stocks at new highs
and selling laggards, reinforcing the idea that 'the strong get
stronger and the weak get weaker.' This perspective reflects a
disciplined approach to market trends and indicates an
understanding of momentum dynamics.

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5.Question
How has momentum investing evolved with modern
research?
Answer:Modern research has solidified momentum investing
as a significant market anomaly, particularly through studies
by Jegadeesh and Titman in the early '90s, which confirmed
that past winners tend to outperform past losers. The
movement from discretionary to rules-based momentum
investing, driven by rigorous quantitative research, has made
momentum strategies more widely accepted and
implemented across various asset classes, including equities,
bonds, and commodities.

6.Question
What role does behavioral finance play in understanding
momentum?
Answer:Behavioral finance provides insights into why
momentum investing works by addressing the psychological
biases that affect investor behavior, such as herd mentality
and overreaction to news. These biases can lead to price

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continuations and reversals, highlighting the importance of
understanding market psychology in the application of
momentum strategies.

7.Question
Why is dual momentum characterized as a revolutionary
investment strategy?
Answer:Dual momentum combines both relative momentum
and absolute momentum, enhancing returns while potentially
reducing downside risk. This approach not only emphasizes
investing in assets that perform well relative to others but
also incorporates strategies to avoid significant losses during
downturns, making it a revolutionary framework for
managing investment risk effectively.
Chapter 3 | Modern Portfolio Theory Principles and
Practices| Q&A
1.Question
What is the main purpose of studying economics
according to Joan Robinson?
Answer:The purpose of studying economics is not to
acquire ready-made answers to questions but to

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learn to avoid being deceived by economists.

2.Question
What does Markowitz's mean-variance optimization aim
to create?
Answer:It aims to construct efficient portfolios that offer the
highest expected return at a given level of risk.

3.Question
What is one major criticism of mean-variance
optimization (MVO)?
Answer:MVO is sensitive to input assumptions, leading to
unreliable and extreme portfolio weightings that fluctuate
significantly.

4.Question
How does the Capital Asset Pricing Model (CAPM)
simplify the process of creating portfolios?
Answer:CAPM reduces the need for complex inputs by
establishing a linear relationship between an asset's excess
return and the market's excess return.

5.Question
What major flaw did empirical testing reveal about

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CAPM?
Answer:Empirical testing showed that CAPM does not
accurately reflect real-world returns, particularly in high beta
and low beta portfolios.

6.Question
What did Fama and French identify as a more robust
model compared to CAPM?
Answer:They proposed a three-factor model adding size and
value risk factors, as it better explained variations in equity
returns.

7.Question
Why is Mandelbrot's critique of traditional financial
models significant?
Answer:He challenged the assumptions of normal price
distribution and independence, highlighting how market
prices exhibit unstable variance and are influenced by events.

8.Question
What is the contribution of the Black-Scholes model to
modern finance?
Answer:The Black-Scholes model introduced a rigorous way

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to price options, which subsequently boosted the popularity
and understanding of financial derivatives.

9.Question
What led to the downfall of portfolio insurance during the
1987 market crash?
Answer:Portfolio insurance exacerbated selling pressure
instead of providing protection, as it encouraged selling off
assets in a declining market.

10.Question
According to the chapter, what remains a valuable lesson
from financial theory despite its flaws?
Answer:A significant lesson is the importance of
constructing diversified portfolios to mitigate risk and the
idea that many professional investment management costs
may not justify their benefits.

11.Question
How does behavioral finance contribute to modern
investing principles?
Answer:Behavioral finance helps explain discrepancies
between theoretical predictions and actual market behavior

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by addressing investor psychology.

12.Question
What enduring finding in finance does the author
emphasize as a valuable strategy?
Answer:The effectiveness of momentum investing, validated
by multiple studies, remains one of the most consistently
reliable market anomalies.

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Chapter 4 | Rational and Not-So-Rational
Explanations of Momentum| Q&A
1.Question
What are the rational explanations behind why
momentum works in investing?
Answer:The first rational explanation posits that
high momentum profits are simply a compensation
for assuming greater risks. In efficient markets, it is
believed that when investors take on more risk, they
should expect higher returns as a reward for that
risk. However, since common risk factors like size
and value do not account for the momentum profits,
ongoing research seeks to uncover new risk factors
that might explain this anomaly.

2.Question
How do behavioral factors contribute to the effectiveness
of momentum investing?
Answer:Behavioral finance suggests momentum profits arise
from systematic and predictable irrational behaviors among
investors. This includes biases such as loss aversion,

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confirmation bias, and herding behavior, all of which can
misalign prices with their true value temporarily. For
instance, investors might overreact to positive news, driving
prices up, followed by a continuation of this trend due to
herding, further reinforcing momentum.

3.Question
What do we learn about investor psychology from the
concept of momentum?
Answer:Investor psychology reveals that emotions such as
fear and greed significantly influence decision-making. The
tendency to cling to losing investments while prematurely
selling winners—known as the disposition effect—reflects an
emotional response rather than a rational analysis, causing
prices to deviate from fundamental values. This behavioral
bias creates the conditions for momentum to develop, as
under- and over-reactions to information lead to price trends.

4.Question
Why is understanding the basis of momentum important
for investors?

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Answer:Understanding why momentum works is crucial for
several reasons: it can boost investor confidence in using
momentum strategies, enhance knowledge about overall
market functionality, provide insights into psychological
biases affecting behavior, aid in developing better models to
capitalize on momentum, and offer a perspective on the
sustainability of momentum profits in the future.

5.Question
What is the significance of behavioral biases in financial
markets, especially regarding momentum?
Answer:Behavioral biases significantly distort market
efficiency, leading to phenomena like momentum. These
biases, which include overconfidence and herding behavior,
can drive prices away from their intrinsic value as investors
react based on emotions rather than rational evaluations,
creating sustained price movements that momentum
strategies can exploit.

6.Question
How do historical studies contribute to our understanding
of momentum?

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Answer:Historical studies, such as those by Jegadeesh and
Titman, have established the persistent nature of momentum
profits over long periods. These studies refute purely
risk-based explanations and suggest that behavioral factors,
like feedback trading and overreaction to trends, underpin the
momentum phenomenon, highlighting the intersection of
psychology and market dynamics.

7.Question
How does the concept of anchoring influence investor
behavior in the context of momentum?
Answer:Anchoring influences investors by causing them to
fixate on initial information or past prices when formulating
their expectations, leading to underreaction to new data. This
behavior keeps asset prices from adjusting promptly to their
fair values, allowing trends to build over time, which
momentum strategies can capitalize on.

8.Question
What is the 'disposition effect' and how does it relate to
momentum?

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Answer:The disposition effect refers to the tendency of
investors to sell winning stocks too soon to realize gains
while holding onto losing stocks for too long, hoping to
recoup losses. This behavior affects market efficiency by
delaying the price discovery process, thereby contributing to
the momentum effect as stocks trend toward their
fundamental values over time.

9.Question
What are the implications of understanding behavioral
factors for future investment strategies?
Answer:Recognizing the impact of behavioral biases allows
investors to create strategies that leverage these
psychological tendencies rather than fall victim to them. This
awareness can lead to the design of momentum portfolios
that effectively navigate the emotional landscape of market
participants, potentially enhancing returns while managing
risk.

10.Question
Why can momentum investing be seen as a reaction to
human behavior rather than a simple risk-arbitrage

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opportunity?
Answer:Momentum investing takes advantage of predictable
behaviors stemming from psychological biases, such as
overconfidence and inattention. Unlike a standard
risk-arbitrage where returns are purely based on measured
risk, momentum exploits the natural tendencies of investors
to react inconsistently, capitalizing on these discrepancies in
market behavior.
Chapter 5 | Asset Selection: The Good, the Bad, and
the Ugly| Q&A
1.Question
What is the main goal of an investor according to this
chapter?
Answer:To capture the highest possible risk
premium while minimizing tail risk or drawdown.

2.Question
How do equities compare to bonds in terms of returns
and safety?
Answer:Over the long term, equities have outperformed
bonds in both returns and predictability, offering a 6.5%

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average annualized premium over the risk-free rate compared
to bonds' 1.9%.

3.Question
What did John Bogle highlight about the yield on
Treasury notes?
Answer:He pointed out that since 1926, the yield on 10-year
U.S. Treasury notes explains 92% of the annualized return
that investors could expect if they held the notes to maturity.

4.Question
Why might traditional diversification with bonds not be
as effective today?
Answer:Since stocks and bonds have been positively
correlated nearly 70% of the time since 1973, relying on
bonds for diversification may not provide the safety investors
expect.

5.Question
What is cognitive dissonance in the context of bond
investment?
Answer:Investors may need a significant market downturn in
bonds to accept that holding a substantial amount of bonds in

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long-term portfolios is not prudent.

6.Question
What is the risk parity strategy, and why might it be
problematic?
Answer:Risk parity strategies often increase fixed-income
exposure over 75% of portfolios to equalize volatility
between stocks and bonds, which can be risky, especially at
historic low interest rates.

7.Question
What message about investing can be gathered from
Warren Buffett's perspective on fixed-income
investments?
Answer:Buffett warned that bonds can be dangerous assets as
they have historically destroyed purchasing power, implying
that caution is necessary when considering fixed-income
investments.

8.Question
Why should investors reconsider the role of commodities
in their portfolios?
Answer:The correlation of commodities with equities has

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risen, and negative roll yields have made commodities less
effective as diversifiers or hedging instruments against
inflation.

9.Question
What does the term 'deworsification' refer to in
investment?
Answer:It refers to the idea that excessive diversification
without discrimination can lead to mediocre performance and
unnecessary expenses in an investment portfolio.

10.Question
How does the author suggest investors can achieve
success with low-cost funds?
Answer:By using low-cost equity and fixed-income index
funds that are appropriately selected based on dual
momentum, investors can achieve investment success
without the costs of actively managed funds.

11.Question
What emotional tendencies affect individual investors'
performance?
Answer:Individual investors tend to respond emotionally to

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market volatility, hold underdiversified portfolios, and
exhibit poor timing and overconfidence, all of which lead to
inferior investment outcomes.

12.Question
What is the recommendation for investors to avoid
emotional responses in portfolio management?
Answer:Investors should adopt a disciplined, rules-based
approach, such as the dual momentum strategy presented in
the book, to avoid emotional pitfalls and make rational
investment decisions.

13.Question
What benefits can momentum strategies provide when
combined with intelligent asset choices?
Answer:Momentum strategies can maximize returns through
risk premium tailwinds, particularly in markets like U.S.
stocks, while minimizing exposure to assets that may detract
from performance.
Chapter 6 | Smart Beta and Other Urban Legends|
Q&A
1.Question

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What is smart beta and how does it differ from
traditional indexing strategies?
Answer:Smart beta refers to investment strategies
that employ alternative weighting schemes instead of
conventional market capitalization weights
commonly used in traditional indexing. These
alternative approaches aim to expose investors to
specific market segments or known risk factors,
such as volatility and dividends, potentially
enhancing the risk-return trade-off.

2.Question
Are smart beta strategies truly "smarter" than
traditional approaches?
Answer:The term "smart beta" might be misleading since
beta itself is a measure of market risk and cannot be
classified as smart or dumb. Rather, strategies labeled as
smart beta often involve active management styles, such as
emphasizing small-cap or value stocks, which may not
always outperform traditional methods.

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3.Question
What are the potential downsides of using smart beta
strategies?
Answer:Smart beta strategies can have higher expenses
compared to traditional index funds. They often incur bigger
transaction costs due to frequent rebalancing and may result
in higher turnover rates, which can eat into returns.
Additionally, their effectiveness may diminish over time as
these strategies become widely adopted.

4.Question
How can investors intelligently evaluate the value and size
premiums in their strategies?
Answer:Investors should assess whether size or value
strategies hold up across various market conditions and
periods through rigorous backtesting. It's crucial to consider
the historical significance of these factors and be sparing in
the reliance on short-term performance data to avoid making
poor investment decisions.

5.Question
What is the significance of momentum as an investment

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strategy?
Answer:Momentum has demonstrated a robust capacity to
generate returns across various market cycles and asset
classes. Studies show reliable momentum premiums over
extended periods, consistently yielding significant positive
returns compared to value and size strategies, underscoring
its importance in strategic portfolio construction.

6.Question
In what ways can investors simplify their strategy
selection without complicating their investment process?
Answer:Most investors may benefit from sticking to
traditional capitalization-weighted index funds, as they tend
to provide stable returns without the complexities associated
with smart beta strategies. A balanced, rebalanced portfolio
of various conventional assets may capture the same
incremental returns sought by smart beta without the higher
costs of implementation.

7.Question
How often should investors review their strategies in light

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of new data and market developments?
Answer:Investors should conduct regular reviews of their
strategies, at least annually, to ensure they remain effective
and suitable in the evolving market conditions. New data
may call for adjustments to strategies to maintain optimal
performance and align with overall investment goals.

8.Question
What are some alternative investment strategies to
consider in place of traditional small-cap and value tilts?
Answer:Investors might explore strategies such as dividend
appreciation, insider sentiment, spin-offs, buybacks, or
high-quality stocks, which could provide enhanced returns
beyond simple factor-based approaches. These alternatives
might leverage more in-depth analysis and market trends.

9.Question
What is the impact of transaction costs on the
effectiveness of smart beta and how can it influence
investor decision-making?
Answer:High transaction costs due to frequent rebalancing

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and turnover can significantly impact the net returns of smart
beta strategies, often negating the intended benefits. Investors
need to weigh these costs against potential returns when
deciding whether to adopt smart beta approaches.

10.Question
What can lead to the disappearance of the size and value
premiums historically observed in equity markets?
Answer:Increased investor participation in small-cap and
value stocks can diminish the historical outperformance of
these equities, potentially erasing the size and value
premiums that were once present in the market. This suggests
that market efficiency alters the profitability of such
strategies over time.

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Chapter 7 | Measuring and Managing Risk| Q&A
1.Question
What is the primary reason investors often underperform
market indices according to the text?
Answer:Investors frequently make poor timing
decisions, such as buying high during exuberant
market conditions and selling low during
downturns, largely driven by emotional reactions
tied to fear and greed.

2.Question
How does absolute momentum differ from relative
momentum?
Answer:Absolute momentum analyzes an asset's
performance against its own past returns, indicating whether
its trend is positive or negative, while relative momentum
compares an asset's performance against other assets.

3.Question
What is the significance of a Sharpe ratio of 1.0 or
greater?
Answer:A Sharpe ratio of 1.0 or greater indicates that the

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investment's returns are favorably high relative to the risks
taken, signifying a strong risk-adjusted performance.

4.Question
What is tail risk and why is it problematic for investors?
Answer:Tail risk refers to the potential for extreme negative
returns that are more severe than expected from a normal
distribution, causing significant capital losses and emotional
distress for investors.

5.Question
How can absolute momentum serve as a protective
measure during bearish markets?
Answer:Absolute momentum helps to avoid large losses by
allowing investors to exit positions early in a downtrend,
opting instead for safer fixed-income instruments, thereby
reducing downside vulnerability.

6.Question
What crucial investment principle does absolute
momentum symbolize according to Paul Tudor Jones?
Answer:Absolute momentum embodies the principle of
'playing great defense' in trading, focusing on risk

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management and capital preservation rather than only
pursuing high returns.

7.Question
How does maximum drawdown help evaluate investment
strategies?
Answer:Maximum drawdown measures the largest drop from
a peak to a trough, providing insights into potential losses an
investor could face during downturns, which aids in
assessing the strategy’s risk profile.

8.Question
Why is understanding behavioral biases important for
investors?
Answer:Recognizing behavioral biases helps investors avoid
emotional decision-making, allowing them to adhere to
disciplined investment strategies that enhance performance
over time.

9.Question
What is the advantage of using dual momentum as an
investment strategy?
Answer:Dual momentum combines both relative and

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absolute momentum to take advantage of strong assets while
minimizing downside risk, creating a balanced approach to
capturing returns.

10.Question
How does absolute momentum enhance portfolio
diversification?
Answer:Unlike relative momentum, which often forces
investors to eliminate assets for stronger performers, absolute
momentum allows investors to retain all assets as long as
they maintain positive trends, thus improving diversification.
Chapter 8 | Global Equities Momentum| Q&A
1.Question
What is the fundamental principle behind dual
momentum investing?
Answer:Dual momentum investing combines both
relative momentum (performance compared to
other assets) and absolute momentum (performance
relative to a risk-free rate) to decide asset allocation.
This approach helps investors optimally allocate

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between U.S. stocks, non-U.S. stocks, and bonds,
minimizing risks during bear markets and
maximizing returns during bull markets.

2.Question
How does dual momentum adapt to changing market
conditions?
Answer:Dual momentum adapts by switching between asset
classes based on their historical performance. For instance, if
U.S. stocks have outperformed non-U.S. stocks relative to
the previous year, the investment shifts to U.S. equities. If
both fall below a certain threshold when compared to
Treasury bills, the strategy reallocates to bonds to protect
capital.

3.Question
Why is the 12-month look-back period significant in
momentum investing?
Answer:The 12-month look-back period is identified as
optimal because it captures enough historical data to smooth
out short-term volatility while enabling timely responses to

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changing market trends. This period minimizes transaction
costs and turnover, leading to more stable returns.

4.Question
What are the advantages of absolute momentum
compared to relative momentum?
Answer:Absolute momentum tends to protect investors
during bear markets by shifting to safer assets like bonds
when stock market returns are negative. It provides a
stop-loss mechanism that helps preserve capital, while
relative momentum is more about capitalizing on the
best-performing assets in a rising market.

5.Question
How has dual momentum performed compared to
traditional investment strategies?
Answer:Dual momentum strategies, like the Global Equities
Momentum (GEM) approach, have demonstrated
significantly higher average annual returns with lower
volatility compared to traditional strategies that maintain
fixed allocations. For instance, GEM has shown nearly

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double the annual return of the ACWI index with reduced
maximum drawdowns.

6.Question
What role do transaction costs play in implementing dual
momentum strategies?
Answer:Transaction costs are relatively low in dual
momentum strategies due to infrequent switching between
assets. The average number of switches in GEM is only 1.35
times per year, which minimizes the impact of costs on
overall portfolio performance.

7.Question
How can GEM be adapted to various investor risk
profiles?
Answer:GEM can accommodate different risk preferences by
allowing investors to adjust their asset allocation. More
conservative investors can increase their bond exposure,
while aggressive investors might leverage the portfolio to
enhance potential returns, demonstrating its versatility.

8.Question
What does the phrase "a tide in the affairs of men, which,

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when taken at the flood, leads to fortune" imply for
investors?
Answer:This phrase encourages investors to recognize and
act on favorable market conditions (the 'tide') promptly. It
emphasizes the importance of seizing opportunities when
they present themselves, underscoring the proactive nature of
successful investing.

9.Question
What discourages traditional permanent allocation
strategies in modern investing?
Answer:The convergence of global markets and increasing
correlations during market stress reduce the effectiveness of
permanent allocations. Investors may find that maintaining
fixed allocations does not provide the intended risk reduction
when markets behave unpredictably.

10.Question
Why is simplicity in investment strategies emphasized in
the context of GEM?
Answer:Simplicity in GEM is important because it

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minimizes the complexity that can lead to errors or
overfitting in more elaborate strategies. A straightforward
approach allows investors to stay disciplined and focused on
long-term outcomes without getting bogged down by
complicated calculations or frequent adjustments.
Chapter 9 | Mo’ Better Momentum| Q&A
1.Question
What is the essence of dual momentum investing
according to the chapter?
Answer:Dual momentum investing combines
relative momentum (comparing assets to each other)
and absolute momentum (comparing an asset's
current value against its past) to maximize expected
returns while minimizing risk. It simplifies investing
by relying on clear performance indicators, avoiding
unnecessary complexity.

2.Question
How does data snooping affect investment strategies?
Answer:Data snooping can lead investors to mistakenly

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believe in the effectiveness of a strategy that is simply a
product of chance. When too many strategies are tested, the
likelihood of finding one that seems to perform well
increases, but this does not guarantee future success.

3.Question
What damage can overfitting do to trading models?
Answer:Overfitting occurs when a model is too rigid,
specifically tailored to past data, which renders it ineffective
for predicting future outcomes. This can lead to systematic
out-of-sample losses as it fails to generalize to new data.

4.Question
Why is there danger in using insufficient data for
backtesting strategies?
Answer:Using too short a data sample can lead to misleading
conclusions. In financial markets, many regimes do not
repeat in predictable ways, and relying on a limited
timeframe increases the risk of noise overpowering the true
signal.

5.Question
What are the benefits of using extensive data periods for

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momentum strategies?
Answer:Utilizing long historical data allows investors to
better gauge the stability and reliability of their strategies
across different market conditions, leading to improved
confidence in their investment decisions.

6.Question
How did researchers come to accept market timing
strategies in the 2000s?
Answer:Before the early 2000s, market timing was widely
dismissed among academics; however, studies such as Brock
et al.'s in 1992 demonstrated that certain trend-following
strategies could yield positive results, prompting a
reevaluation of the effectiveness of market timing.

7.Question
What factors make moving averages popular in market
timing?
Answer:Moving averages smooth out price data over time,
helping investors identify trends and reduce the noise in daily
price fluctuations, making them a practical tool for timing

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market entries and exits.

8.Question
What is the implication of the CAPE ratio in market
timing according to the chapter?
Answer:While a high CAPE ratio indicates that stocks may
be overvalued, it does not necessarily signal an imminent
market decline. Historical trends show that markets can
remain elevated for extended periods even after reaching
high CAPE levels.

9.Question
What role does absolute momentum play in risk
management for investors?
Answer:Absolute momentum serves as a critical tool for risk
management by allowing investors to stay in or exit markets
based on their long-term performance trends, minimizing the
potential for significant losses during downturns.

10.Question
How does combining relative and absolute momentum
enhance investment strategies?
Answer:Combining relative and absolute momentum

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strategies can amplify returns while managing volatility. This
dual approach ensures that assets are not only performing
well against others but are also holding steady compared to
their historical performance.

11.Question
What is the importance of simplicity in dual momentum
investing as suggested by the quote from Leonardo da
Vinci?
Answer:The quote reflects that simplicity in dual momentum
investing leads to clearer decision-making without getting
bogged down in complex models, providing a more effective
and intuitive framework for investors.

12.Question
What are the potential enhancements to relative strength
momentum mentioned in the chapter?
Answer:The chapter discusses several enhancements to
relative strength momentum, including focusing on stocks
that are near their 52-week highs, and integrating price,
earnings, and revenue momentum to achieve better returns.

13.Question

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In what ways can investors use dual momentum beyond
equities?
Answer:Investors can apply dual momentum strategies in
various asset classes, including fixed-income securities and
sector rotation, allowing for flexibility in portfolio
management during different market conditions.

14.Question
What is the key takeaway for investors regarding the use
of dual momentum strategies?
Answer:Investors are encouraged to adopt dual momentum
strategies for their simplicity and effectiveness, leveraging
historical data to enhance their performance while
maintaining an active awareness of risks associated with
overfitting and data snooping.

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Chapter 10 | Final Thoughts| Q&A
1.Question
What is the primary lesson from the quote by Charles
Darwin about adaptability in investing?
Answer:The quote highlights that survival in
investing is not determined by strength or
intelligence, but by adaptability to changing
circumstances. This underscores the importance of
being flexible and open to new strategies, such as
dual momentum, which adapts to market dynamics.

2.Question
How does dual momentum differ from the old investment
paradigms?
Answer:Dual momentum contrasts with the old paradigms by
being more adaptable and responsive to market conditions.
Instead of relying solely on historical strategies like fixed
income or over-diversification, dual momentum dynamically
shifts exposure based on current trends, allowing for
enhanced returns and risk management.

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3.Question
What is the significance of Lao Tzu’s philosophy in the
context of dual momentum investing?
Answer:Lao Tzu's philosophy suggests that by understanding
and aligning with the inherent nature of the market, investors
can manage their strategies effectively. Dual momentum
embodies this by using market dynamics to adjust investment
exposures proactively, rather than forcing investment choices
that may not align with the market.

4.Question
Why is adherence to a proven investment model
emphasized in the text?
Answer:The importance of sticking to a proven model, like
dual momentum, is emphasized because human judgment is
often flawed and influenced by biases. Discipline in
following a reliable framework helps investors avoid
emotional decision-making that can lead to losses.

5.Question
How does dual momentum help investors overcome
behavioral biases?

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Answer:Dual momentum assists investors by providing a
systematic approach that removes emotional and behavioral
biases from the decision-making process. Instead of relying
on subjective judgments, investors can follow a predefined
model that captures trends effectively.

6.Question
What challenges might dual momentum investors face
during periods of underperformance?
Answer:During times of underperformance relative to
benchmarks, investors may struggle with maintaining
discipline and may be tempted to abandon their strategy,
leading to poor long-term decisions. Staying focused on the
big picture is crucial to avoid making reactive choices based
on short-term fluctuations.

7.Question
What does the quote from Victor Hugo suggest about
opportunities in investing?
Answer:Victor Hugo's quote implies that how one perceives
the future largely depends on their mindset. For the

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courageous and adaptable investor, the future represents
opportunities ripe for exploration, reinforcing the notion that
dual momentum can lead to favorable outcomes by
embracing market changes.

8.Question
What role does momentum play in the historical
performance of investing strategies?
Answer:Momentum has historically outperformed other
strategies over the past 200 years across various markets,
indicating that it is a significant anomaly. This persistence
suggests that the principles behind momentum investing
remain powerful and relevant despite market changes.

9.Question
Why does the author compare momentum investing to
being on a train?
Answer:The train analogy illustrates the journey of
momentum investing—how it requires ongoing movement
and adaptability. Just as one must switch trains or adjust
direction to keep making progress, investors must be willing

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to shift their strategies in response to market conditions to
maximize returns.

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Dual Momentum Investing Quiz and Test
Check the Correct Answer on Bookey Website

Chapter 1 | World’s First Index Fund| Quiz and Test

1.John McQuown and Bill Fouse are credited with
creating the first index fund in 1971 according to
Gary Antonacci.
2.Dee's investment strategy involved selecting stocks
randomly based on arbitrary names, which surprisingly
outperformed professional managers.
3.Antonacci believes that it is easy to consistently beat the
market by using investment strategies rather than
replicating market returns.
Chapter 2 | What Goes Up … Stays Up| Quiz and
Test
1.Momentum investing is defined as the tendency of
investments to persist in their performance, where
assets that have performed well are likely to
continue doing well.
2.The concept of momentum investing originated in the 21st

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 century with new economic theories.
3.Studies by Jegadeesh and Titman in the 1990s
demonstrated that past winners in the stock market tend to
continue outperforming their peers.
Chapter 3 | Modern Portfolio Theory Principles and
Practices| Quiz and Test
1.Harry Markowitz introduced mean-variance
optimization (MVO) in 1952 to create efficient
portfolios that maximize expected returns for
given levels of risk.
2.The Capital Asset Pricing Model (CAPM) has been proven
to be reliable without any limitations in predicting
high-beta portfolio returns.
3.The Black-Scholes model is universally accepted and is
free from any criticisms regarding its application in
extreme market conditions.

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Chapter 4 | Rational and Not-So-Rational
Explanations of Momentum| Quiz and Test
1.Momentum profits are fully explained by existing
risk factors according to academics.
2.Behavioral finance suggests that irrational investor
behavior contributes to market momentum.
3.The author concludes that the combination of emotional
biases leads to consistent momentum effects in the market.
Chapter 5 | Asset Selection: The Good, the Bad, and
the Ugly| Quiz and Test
1.Warren Buffett states that diversification is mainly
needed when investors lack understanding.
2.Long-term government bonds have historically yielded a
higher return than U.S. equities.
3.Commodities and hedge funds frequently underperform
and are criticized for their high fees and complexities.
Chapter 6 | Smart Beta and Other Urban Legends|
Quiz and Test
1.Smart beta strategies aim to provide better
risk-return trade-offs than conventional

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 capitalization-weighted indexes.
2.Research suggests that small caps consistently outperform
large caps in the market.
3.Momentum is identified as a strong and stable market
anomaly that outperforms size and value factors.

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Chapter 7 | Measuring and Managing Risk| Quiz
and Test
1.Average investors often outperform mutual funds
and index funds due to their superior timing
decisions.
2.Absolute momentum uses an asset's past performance to
predict future returns and helps protect investors during
bear markets.
3.The Sharpe ratio favors upside volatility equally as
downside volatility when evaluating investment strategies.
Chapter 8 | Global Equities Momentum| Quiz and
Test
1.Momentum investing focuses solely on U.S. stocks
without considering global markets.
2.A 12-month look-back period is recommended for
measuring momentum in the investment strategies outlined
in the chapter.
3.The Global Equities Momentum (GEM) strategy incurs
high transaction costs and frequent switches, leading to
unstable returns.

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Chapter 9 | Mo’ Better Momentum| Quiz and Test
1.Dual momentum strategy offers lower expected
returns with higher expected risk.
2.Historical research supports the use of 6-month look-back
periods for momentum strategies.
3.Combining relative strength momentum with value
strategies has shown to enhance performance metrics.

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Chapter 10 | Final Thoughts| Quiz and Test
1.The dual momentum strategy promotes a carefree
approach to market fluctuations by following its
model.
2.The old investment paradigm recommended excessive
diversification as a way to enhance returns.
3.Investors using dual momentum may experience periods of
underperformance, requiring them to adhere to discipline
and patience.

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