Mark (00:00:00) – Momentum is this idea of hopping on horses that are already running. Buying stocks that are forming up or creating the movement in the markets.

Tarek (00:00:10) – The returns are still there, but they’re not in the same type of companies. We’re seeing a switch or a rotation to more value based companies.

Mark (00:00:19) – Well, we’ve got these disciplines. We’ve got these screens that we run for momentum. They pop out the 12 names, we buy them, it’s heartless. It’s cold. You know, we ever love a stock. Oh yeah. For about three.

Tarek (00:00:31) – Months. Hightower talk listeners. As you can tell we have a great episode prepared for you. In these episodes, we discuss a lot of personal finance and investing concepts. But when it comes down to it, what really matters is how we can apply these concepts to you and your finances. So if you’re listening and you like what we have to say, please reach out to Mark or myself, and we’d be happy to sit down and discuss how to help you get the most out of your investments and your financial plan, or perhaps create you a financial plan.

Tarek (00:00:59) – Contact info is in the episode description. All right, let’s get to the show. We’re recovering today, something that I think is very, very interesting. It’s it’s portfolio strategies. But more specifically, it’s it’s the age old question of value investing versus momentum investing. And we use those terms to describe real strategies that we run at tower. We offer a value strategy. And our momentum strategy is our proprietary in-house strategy that we’ve run. And we’ve run it for some time now. So I think before we get any further, though, it’s helpful for us to define some terms. So what do we mean by value? Now the term value is used in the investment world a lot. And generally it describes a style of investing that focuses on companies that have high intrinsic value that isn’t realized yet. So what that means is maybe they through their analysis, they determine these, particularly these particular companies are undervalued because they would have maybe low price to earnings ratio. So the the price of the stock versus the amount of earnings you’re getting is low.

Tarek (00:02:01) – So it’s undervalued. You would have low book value to earnings ratio. All the all the sort of fundamental ratios would be low. We would say you.

Mark (00:02:09) – Probably have higher dividend yield.

Tarek (00:02:11) – Yeah. Higher dividend yield. Exactly. Generally these are older more established companies I think you get the picture. You know. And that’ll be good enough for what we’re talking about. And Mark, why don’t you tell our listeners a little bit about what we mean by momentum.

Mark (00:02:23) – Sure. Momentum is this idea of hopping on horses that are already running, buying stocks that are forming up or creating the movement in the market. So, there are different styles of momentum. But for us, what we do is we try and identify the stocks that have the characteristics that will perform well in the next three months. Our goal is simply to own the 12 best performing names on the Toronto Stock Exchange in the next quarter. Are we successful at that? No, no, we never own all 12, but we may own 6 or 8 of the 12 best performing names.

Mark (00:03:05) – And when we do, we’ve got very good performance because, you know, you’re going to outperform the market when you’ve got those there. Let’s let’s stop with that as our definitions and talk about how how these work together to because what we had in the Covid years and a little bit before Covid momentum was just a honey of a strategy. And so we yeah, we run our screens. We we watch these stocks perform. It’s a lot of work. We rebalance every portfolio every three months. And then we watch as we happen to own the, you know, six half of the 12 best performing names in the next quarter. And then we rebalance and do it again. However, that has changed recently, Tariq.

Tarek (00:03:51) – That’s right. And so what we saw is, you know, what they would maybe call that as maybe a growth sort of, focus in the market. And so, you know, lower interest rates, driving things up. Now, what we’ve seen in the last, let’s say, six months is returns are still there, but they’re not in the same type of companies.

Tarek (00:04:11) – We’re seeing a switch or a rotation to more value based companies. Now, you know, this is kind of a thing that’s normal. If you listen to the talking Heads on BNN, you’ll often hear them say, oh, it’s a value market or it’s a growth market for these reasons or, or those reasons. And that’s fine. but what is important is okay, what does that mean from your portfolio? How do you determine, should I be more momentum oriented or should I be more value oriented? And, you know, we’re proud to say it. Tower. We try to make sure you have a little bit of exposure to both. And so what? What’s unique about that is not a lot of firms or, you know, honestly, a lot of portfolio managers would say, if you’re a value manager, you cannot be a momentum manager. If you’re a momentum manager, you can’t be a value manager. It takes a different headspace to do that. And it would be poor disciplines do that.

Tarek (00:05:00) – But we don’t agree with that, that logic. We don’t agree with that logic at all. And I’ll let you tell them.

Mark (00:05:05) – Well, we’ve got these disciplines, we’ve got these screens that we run for momentum. They pop out the 12 names, we buy them, it’s heartless, it’s cold. You know, we we. Do you ever love a stock? Oh yeah. For about three months. Exactly. And and the same with value. What we’re doing in the value by buying fundamental indexes is we’re buying indexes of stocks, large pockets of stocks. But these are stocks that have better than average market value, higher dividend yield, lower price to earnings, lower price to book. Those are the ones that populate these indexes. And when you do it with formula. So our common base in our investment strategy is simply to use mathematical disciplines. Ways to buy, ways to sell. Don’t wait around if it’s not working. Now what’s interesting is and I’ve told you this before, for, you know, we, we typically recommend people use one third in momentum and two thirds in value.

Mark (00:06:03) – And the reason is the momentum is a concentrated portfolio. There’s higher risk in it. And then the value is broadly based large cap stocks. When we’ve got these with Elaine and I, with Elaine and me, with me, with Elena, me we had me in the value large cap stocks and she was in the momentum and her portfolio actually became bigger than mine, which really bothers me quite a bit. So because I’m competitive now, what we’ve seen in the last year or two, I think it might be two, but it might be 18 months. we’ve seen my portfolio catch up to her, so we’re about equal now, which means that value is catching up. It’s this groundswell of fundamental companies that are coming into their own at this point in the cycle. So, it’s a the point is, we would like you to own a little bit of each. You can tell us how much of each you’d prefer. for sure, we want to be to say this, that the momentum strategy is viewed as a concentrated portfolio.

Mark (00:07:08) – It is considered a higher risk portfolio. And therefore, if you only own momentum in our strategies, we would like to know that you’ve got other portfolios elsewhere to counterbalance this concentration. Yeah. If you don’t own it, stocks elsewhere, then we would like to have you own a little bit of each, maybe 50 over 50 like Elaine and I have right now. Or maybe it’s, two thirds value and one third momentum. I think I’m done. Eric. What else?

Tarek (00:07:36) – I would just say reach out to me. or, Mark, if that’s your contact. And we’ll be happy to help set your portfolio up in a way that makes sense for you. We’ll get your information, we’ll figure out what works best for you. We’re happy to do something specific to your situation. and that’s what I would. I just reemphasize the reason we as managers can do both is is the math behind it. We’re not trying to make any value judgments. And I say the term value judgment, not speaking about value stocks.

Tarek (00:08:03) – We’re letting the math speak for itself. And so that’s that’s how we can, you know, sort of separate ourselves out. but yeah, those are our two main strategies. And now let me.

Mark (00:08:12) – Add this to. Both of these strategies work. They are, and typically they work in complementary styles. So when one is not working, the other does. And that’s the reason we would like you to have something that’s always working. What does not work. Yeah. Be very clear. What does not work is trying to be a momentum strategy investor. And then suddenly the value starts to perform and you abandon this strategy and you go over here. Let me tell you something. You’ll be late. Yes, you’ll miss the value market. And by the time you’re over here, you’re going to start to see momentum working, and you’re going to be you’re going to miss this one. The key is to pick the strategy. Stay with it. Ride them both. We give you both horses. They’re pulling your your portfolio forward and we think it’ll work.

Mark (00:09:01) – I’m done.

Tarek (00:09:01) – Absolutely I think I think that’s a great place to end value momentum both here at tower. Thank you for tuning in.