Value-Momentum Intersection
Favor assets that are both inexpensive and already moving upward
- Difficulty
- Moderate
- Time to result
- ~months to results
- Steps
- 5
- Confidence
- 96%
Faber identifies value and momentum or trend as the two main historical schools of quantitative investing. Value seeks assets that are inexpensive by a consistent metric; momentum seeks markets that are rising and, importantly, avoids those that are falling. His preferred setup occurs where the signals intersect: an asset is both cheap and moving upward. The combination uses valuation to identify prospective return and trend to avoid treating every falling price as an immediate bargain. It can be applied to individual stocks, sector rotation, countries, commodities, bonds, or a multi-asset portfolio. The method does not claim that either signal works continuously. Instead, it combines two independently established tendencies and applies them through objective sorting rules.
Origin
Extracted from Masters in Business
Core principles
- 01Value and momentum have both worked historically
- 02Cheap assets can keep getting cheaper
- 03Trend confirms that the market has begun rewarding the value
- 04The intersection is stronger than allegiance to one investing school
How to run it
- 1
Define comparable assets
Choose the stocks, sectors, countries, or asset classes to rank.
- 2
Rank value
Use a consistent valuation measure, such as dividends or another earnings metric, to identify inexpensive assets.
Pro tip Compare like with like across the full universe.
Watch out Cheap assets can continue getting cheaper.
- 3
Rank momentum
Measure which assets are rising and which are declining.
Pro tip Use the same lookback and rule for every candidate.
- 4
Find the overlap
Select the candidates that are both attractively valued and in a positive trend.
Pro tip Treat the overlap as the preferred setup rather than forcing a signal from one side.
- 5
Maintain the rules
Reapply the value and momentum tests on the strategy's defined schedule.
Watch out Do not change the method merely because one factor goes temporarily out of favor.
In the wild
Barry Ritholtz cites Wes Gray's work combining less expensive stocks with stocks that are doing well or trending upward. Faber agrees that value and momentum describe compatible parts of the same quantitative opportunity.
→ The portfolio avoids choosing between cheapness and improving price action.
Common mistakes
Buying on cheapness alone
An asset can remain cheap while continuing to decline, so valuation by itself does not confirm improving market behavior.
Treating the schools as mutually exclusive
Faber says both value and momentum have worked historically even though followers often reject the other style.
Is it for you?
Best for
Quantitative investors choosing among stocks, sectors, countries, or asset classes.
Not ideal for
Investors seeking a purely discretionary forecast or an immediate short-term trade.
From the transcript
“Our favorite setup is when they intersect, you know, when something is cheap and going up.”
“Value buying stocks that are cheap, for example, whether it's by dividends or some other earnings metric, but also momentum and trend buying markets that…”
From the episode
Cambria CIO Meb Faber: Masters in Business (Audio)
Meb Faber