The Case for Momentum investing

Momentum is the tendency of investments to exhibit persistence in their relative performance. Investments that have performed relatively well, continue to perform relatively well; those that have performed relatively poorly, continue to perform relatively poorly. Momentum is about much more than buying a handful of hot stocks – it is a disciplined, systematic investing style that applies across asset classes.

Momentum is a phenomenon driven by investor behavior: slow reaction to new information; asymmetric responses to winning and losing investments; and the "bandwagon” effect. Numerous academic and practitioner studies have confirmed momentum’s existence.

Virtually all investors can expect higher risk-adjusted returns by adding momentum to their portfolios. Growth investors will see that momentum delivers much better performance. Value investors will find momentum to be an effective complement. Value-growth investors will want to consider momentum as an alternative to their growth allocation. 

Fact, Fiction and Momentum Investing 

It’s been over 20 years since the academic discovery of momentum investing (Jegadeesh and Titman (1993), Asness (1994)), yet much confusion and debate remains regarding its efficacy and its use as a practical investment tool. In some cases “confusion and debate” is us attempting to be polite, as it is near impossible for informed practitioners and academics to still believe some of the myths uttered about momentum — but that impossibility is often belied by real world statements. In this article, we aim to clear up much of the confusion by documenting what we know about momentum and disproving many of the often-repeated myths. We highlight ten myths about momentum and refute them, using results from widely circulated academic papers and analysis from the simplest and best publicly available data. 

The Interaction of Value and Momentum Strategies 

Value and momentum strategies both have demonstrated power to predict the cross- section of stock returns, but are these strategies related? Measures of momentum and value are negatively correlated across stocks, yet each is positively related to the cross-section of average stock returns. We examine whether the marginal power of value or momentum differs depending upon the level of the other variable. Value strategies work, in general, but are strongest among low-momentum (loser) stocks and weakest among high-momentum (winner) stocks. The momentum strategy works, in general, but is particularly strong among low-value (expensive) stocks. These results hold despite finding comparable spreads in value measures among stocks with different levels of momentum and comparable spreads in the momentum measure among stocks with different levels of value. Any explanation for why value and momentum work must explain this interaction.

All photography by Jared Chambers