If you’ve ever watched basketball, you know that some players have a hot hand — a period when they make all of their shots.
We’ve all seen players with hot hands, from pick-up games among school kids to competition between the best players in the NBA. We tend to believe that a player is more likely to make another shot if the previous attempts were successful.
For decades, academic researchers told us we were wrong. In 1985, experts behind The Hot Hand in Basketball: On the Misperception of Random Sequences study used math to show that there was no such thing as a hot hand.
Other researchers used the same approach to confirm this claim. Yet, fans continued to watch players dominate games by going on seemingly endless scoring streaks.
And they weren’t convinced…
The Mystery and Science of a Winning Streak
In 2019, researchers from Australia and France took another look at the data because something wasn’t adding up. In A Cold Shower for the Hot Hand Fallacy: Robust Evidence that Belief in the Hot Hand is Justified, they proved that the fans were right. Players do have a hot hand in some games.
Back in 1985, researchers loaded data onto punch cards. These were run through a computer to solve problems.
So, in 2019, these researchers tracked down those cards and digitized the data. They found flaws in the methodology. All the papers replicating the initial research used the same flawed approach.
The hot hand phenomenon also shows up in stocks and the investing world. Finance professors fell into the same pattern for many years. Nobel Prize winners used complex math to show that no one could beat the market.
Then, a paper published in 1967 showed this was wrong … you could beat the market using momentum. After that paper was published, researchers went to work to disprove it. They couldn’t.
Some great minds in the academic community concluded that there must be a bug in the programming. They couldn’t find it, but they were sure it was there.
Others assumed the results were a Type I statistical error. This allowed them to accept the results while still claiming they were invalid.
Play the Market With a Hot Hand and Momentum Stocks
In 1993, researchers showed that you could consistently beat the market. All you needed to do was buy stocks that were going up and sell stocks that were going down. Momentum shows us that stocks already on their way up are more likely to continue moving higher in the near future.
This is all obvious to us now. But for decades, researchers and investors refused to believe it. Even today, some investors prefer to ignore the data. They look for stocks that are beaten down, proclaiming they have an extraordinary power that allows them to ignore the market data.
They’re like the researchers who showed there was no hot hand in basketball. They ignore what they see and act on what they believe.
That’s a risky approach to investing. My colleague Adam O’Dell works hard to avoid unnecessary risk. He simply follows the data and looks at momentum — that controversial strategy uncovered in 1967 that proved to traders it’s possible to crush the market.
After analyzing thousands of stocks and a backtest over 24 years of data, he’s designed his own disciplined approach, using a trading strategy he calls “Infinite Momentum.” Here, he only looks for stocks that are going up and show clear signs that they will continue to go up for a minimum of 30 days.
Then, every four weeks, he reassesses the portfolio’s momentum, sells the stocks that are losing steam, and replaces them with new stocks based on his system’s criteria.
It’s a strategy that has proven to work really well.
Results show that the Infinite Momentum system would have beat the market 300 to 1 over the last 24 years, and that’s based on a simple strategy that rebalances the portfolio once every four weeks.
Now is the perfect time to join his premium service because he’s getting ready to rotate the portfolio again on Friday, March 8.
Until next time,
Mike Carr
Chief Market Technician