When I graduated from college, armed with a degree in finance, and entered the investment-management business 30 years ago, quantitative-based factor investing was still in its infancy. The “efficient-market hypothesis,” which holds that asset prices reflect all available information, held sway. In 1993, two academics, Sheridan Titman and Narasimhan Jegadeesh, published a landmark paper on momentum investing in which they demonstrated that strategies of buying recent stock winners and selling recent losers generated abnormal returns. Their findings struck a strong blow against EMH dogma and challenged the blind acceptance of the superiority of passive investment strategies.

I am delighted to report that on September 16, the co-authors were awarded the prestigious biennial Wharton-Jacobs Levy Prize for Quantitative Financial Innovation for their pioneering 1993 paper published in The Journal of Finance, “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency.” I am proud that Sheridan, a distinguished finance professor at the University of Texas’ McCombs School of Business, is a good friend, mentor and collaborator, and someone with whom I’ve been privileged to work on numerous investment-related research papers and strategies over the years.

Since first documenting the momentum factor, Sheridan, a prolific writer who has published more than 250 research papers, has continued to conduct research on momentum, demonstrating that it works across different securities, geographies, and asset classes (I collaborated with Sheridan on a paper about the merits of combining momentum and value—two factors that are not highly correlated—in a single portfolio strategy). Today, there are countless fund managers (including me) who incorporate variations of momentum in their strategies.

Sheridan adheres to an investor-behavior explanation for the presence of the momentum factor. For instance, investors tend to over- or underreact, typically overreacting to information that confirms prior beliefs and underreacting to information that contradicts those beliefs. This strong behavioral bias is a form of overconfidence, and feeds investors’ propensity to buy stocks that are going up (i.e., hold on to winners) and sell securities that are going down (sell losers) regardless of fundamentals. Note how his findings contradicted prior conventional wisdom, which held that investors should buy what went down and sell what went up.

In a 1999 paper that he co-authored with Kent Daniel, Sheridan found that momentum profits are significantly higher when the strategy is implemented on growth (low book-to-market) stocks than on value (high book-to-market) stocks. They suggest that this result may be due to the fact that it is more difficult to evaluate growth stocks than to assess value stocks. Psychologists say that people tend to be more overconfident about their ability to master more ambiguous tasks, which may help to explain why momentum is likely to be greater for growth stocks. Over the past few decades, innumerable papers by academics and practitioners have confirmed the existence of investor behavioral quirks including overconfidence and confirmation bias, and the extrapolation of recent events or market action into the future—in short, investors believe that they are thinking when they are in fact feeling.

Sheridan continues to conduct research into investor behavior. For instance, in a recent study, he documented how different types of investors in China react differently to the same information, when he studied the discrepancies in share fluctuations of the same Chinese securities held by individual vs. institutional investors. As for momentum, financial economists are still far from reaching a consensus on what generates momentum profits, which continues to make the topic a fertile subject for further research.

It was an honor for me to be present at the New York City conference where the Wharton-Jacobs Levy Prize was bestowed on Sheridan and Jegadeesh, who is a professor at Emory University’s Goizueta Business School. I was fortunate to sit and chat with several of the most prominent finance academics in the nation at the event. The Journal of Portfolio Management, a leading industry publication, devoted a page in a recent issue to congratulating the co-authors. In the announcement, the Journal cited three papers that Sheridan had contributed over the years to the publication, one of which am honored to have co-authored.

But, most of all: Congratulations, Sheridan!

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