DIY Momentum QnA and Discussion

** I follow factor Investing Based on Z-Score:**

Why It Is Better:

1. Objective Measurement: The Z-score provides a standardized way to measure how far a stock’s price is from its mean, allowing for a more objective comparison across different stocks.
2. Statistical Rigor: Utilizing the Z-score incorporates statistical methods, making the investment process more data-driven and potentially reducing bias.
3. Enhanced Momentum Capture: By focusing on deviations from the mean, Z-score can help identify strong momentum plays, as stocks significantly above or below their historical average may indicate strong trends.
4. Risk Management: Z-scores can help identify outliers, potentially flagging extremely overbought or oversold conditions which can be useful for risk management.

Pros:

1. Quantitative Approach: Reduces emotional and subjective biases in stock selection.
2. Scalability: Can be easily applied to large datasets, making it suitable for institutional investors.
3. Versatility: Can be used in conjunction with other factors like value, quality, or size to enhance a multi-factor investing strategy.
4. Early Signal: Helps in identifying stocks that are starting to diverge from their historical performance, potentially catching trends early.

Cons:

1. Over-Reliance on Historical Data: Z-score is based on historical price data, which may not always predict future performance accurately.
2. Market Anomalies: Extreme market conditions can distort Z-scores, leading to false signals.
3. Complexity: Requires a good understanding of statistical concepts, which might not be suitable for all investors.
4. Volatility Sensitivity: Stocks with high volatility might frequently show significant Z-score deviations, potentially leading to more frequent trading and higher transaction costs.

While investing consider the following points:

• Data Sources: Reliable and consistent data sources are crucial for calculating accurate Z-scores.
• Backtesting: Share experiences and results from backtesting Z-score strategies to provide practical insights.
• Integration with Other Factors: Discuss how Z-score can be integrated with other factors like earnings growth, price-to-earnings ratio, or other momentum indicators.
• Real-World Application: Share examples of stocks that performed well using a Z-score approach and those that didn’t, to provide a balanced view.
• Continuous Monitoring: Highlight the importance of regularly updating the Z-score calculations to reflect the most recent data and maintain the strategy’s relevance.

Engaging in discussions about these points can provide a comprehensive understanding of Z-score based factor investing and its practical applications.