My long-running Hot Hands strategy has been anything but hot for, well, quite some time now. Just when it appeared to have caught fire, it was doused with ice water.

After a solid 2022, 2023 is shaping up to be a stinker (to use a technical term) of a year for the Hot Hands strategy. 2023’s Hot Hands fund, Equity Income (VEIPX), was only up 2.2% on the year at the end of November. That’s miles behind Total Stock Market Index’s (VTSAX) 19.6% gain. Ouch.

Is the Hot Hands formula broken, or do we need to be patient?

That’s the critical question anyone following or considering the strategy must answer. I’m willing to give the Hot Hands another go—yes, I’ve been following this strategy with my own money for years; I wouldn’t write to you about it if I wasn’t willing to do that.

But I don’t expect you to follow my lead mindlessly. So, I’ll give you the analysis and context you need to come to your own conclusion. Let’s start at the beginning.

The Basics

Dan first wrote about the Hot Hands strategy way back in May 1995. He and I have followed the same rule set—updating it as new funds have been introduced—ever since.

The idea behind the Hot Hands strategy is simple: What has outperformed will continue to outperform—and what has trailed will continue to trail—until market trends, sentiment and economic conditions change.

In the industry parlance, this is called momentum investing. It has many practitioners, including Vanguard. In 2018, they launched U.S. Momentum Factor ETF (VFMO) specifically to take advantage of, well, market momentum.

While some investors get pretty fancy with their momentum calculations, we’ve always kept it simple.

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