[[Start here]] → [[expose to return drivers|drivers]] → [[strong stocks beat weak stocks|momentum]] → three timeframes --- Bill O’Neil, Wall St veteran and founder of Investors Business Daily, once compared running an investment portfolio to managing a fashion store - the best practice is to quickly discount the lines that aren't selling in order to rotate your capital into the lines that are. But while running winners and selling losers is a great maxim, for some reason it's much harder to apply in practice. It's a primal human instinct to take profits on winners while clinging onto losers in hope they'll return to the levels we bought them at. These attitudes can be terribly costly to portfolio profits. Learning to cut losers and run winners requires fighting these human instincts, and the best weapon in the battle is to have an understanding of what I like to call the '**structure of price momentum**'. ## The structure of price momentum Academic research into the momentum effect illustrates three clear timeframes for momentum effects. - In the very short term (1w to 2m) prices tend to **_reverse_** their previous trend. - In the medium term (6m to 1y) prices tend to **_continue_** their previous trend. - In the long term (3y to 5y) prices tend to **_reverse_** their previous trend. We can think of these in terms of fashion: * There is a “shock of the new” - [[momentum reverses in the short term]] * Fashion lasts for a season - [[momentum continues for three to twelve months]] * Everything comes back into fashion - [[momentum reverses after three to five years]] The notes above provide a summary of some of the research into these phenomena. ## Run winners, cut losers… like an actuary Most people treat the stock market as though it's the fashion parade as mentioned in the opening paragraph - buying glamour stocks and shunning value. But many of the wealthiest investors have treated the market actuarially. An actuary can fairly accurately predict an average life expectancy from statistics, and in just the same way, actuarially minded investors have a greater understanding of how and when prices tend to react.