Quoting from the third link above:
> So it has high excess returns and has worked basically everywhere it has been tested, what’s not to like? As the authors go on to say, this incredible performance is also accompanied by periodic, soul-crushing declines:
> "In 1932, the winners-minus-losers (WML) strategy [momentum] delivered a -91.59% return in just two months. In 2009, momentum experienced a crash of -73.42% in three months. Even the large returns of momentum do not compensate an investor with reasonable risk aversion for these sudden crashes that take decades to recover from."
> This is why momentum investing can be so deadly. When things are going right, they can go very right, but when they go wrong, it can get ugly fast.
[0] See https://www.investopedia.com/terms/e/equityriskpremium.asp or the corresponding Wikipedia article.
Yes, but there are times when one takes on extra risks that offer no added reward:
> [Mladina's] findings[0] were surprising. The factor exposure of real estate roughly resembles that of a portfolio consisting of 60% small-cap value stocks and 40% high-yield bonds. This tells us that REITs are not necessarily going to give us something we could not already get by investing in stocks and bonds.
> But there’s more to know. One of the study’s most important findings also suggested that real estate risk is primarily driven by the idiosyncratic risk of the real estate sector. This point is crucial to understanding why REITs might not fit into a portfolio as perfectly as presumed. Put another way, Mladina found that REIT returns were explained by priced risk factors, but real estate risk was primarily driven by the idiosyncratic risk of the real estate sector, which is not a priced risk. That is, it is not a risk that you expect a positive return for taking.
* https://rationalreminder.ca/blog/2019/8/23/reconsidering-rei...
* [0] https://joi.pm-research.com/content/27/1/109
So momentum does have added risk, but one is rewarded for it. Similarly for small-cap: smaller companies are riskier than larger ones, and so a (rational) investor would demand more reward (returns) for investing in such a company.
> Finally, the "game perspective". An investor would not really care about the stock, but only about the behavior of other investors.
Well, momentum investing does give good returns over the market average:
> Momentum investing is a system of buying stocks or other securities that have had high returns over the past three to twelve months, and selling those that have had poor returns over the same period.[1][2]
* https://en.wikipedia.org/wiki/Momentum_investing
* https://en.wikipedia.org/wiki/Momentum_(finance)
Basically:
> Every January 1st you look at the newspaper and find the best performing stocks of the prior year. You invest your money among those stocks and then go about your life for 12 months.
> On January 1st of the next year you check the newspaper again to find the best performing stocks over the past year. Any of your current holdings that are no longer on the list are sold and any newcomers are added to your portfolio.
> Repeat every year until rich.
* https://ofdollarsanddata.com/let-them-vote/
Excess returns are respectable:
> From 1927 to 2011, momentum had a monthly excess return of 1.75%, controlling for the Fama and French factors. Moreover, momentum is not just a US stock market anomaly. Momentum has been shown in European equities, emerging markets, country stock indices, industry portfolios, currency markets, commodities, and across asset classes.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2041429