Momentum Works. Why Do So Many Investors Pretend It Doesn’t?

One of the hardest things for a fundamental analyst — or a quantitative analyst trained in a traditional university setting, even at the best Ivy League schools — is accepting that momentum is one of, if not the best quantitative factors for selecting and trading stocks.

Momentum measures price movement in stocks, particularly the speed at which stock prices move higher or lower over a set period. Rigorous studies by portfolio managers, traders, and empirical academic researchers consistently show that stocks with above-average intermediate-term momentum (typically measured over 6–12 months) tend to outperform the broader market in the following period. Put simply, companies with accelerating prices are generally a strong pool from which to select long positions.

Recently, I spoke with a quantitative analyst — someone very sharp who managed significant sums for one of the nation’s top quantitative equity firms. We discussed various fundamental factors such as profitability, quality, value, and yes, momentum. As with many similar conversations I’ve had, momentum came up last, despite being the most consistently profitable factor. This led me to ask: Why do so many ignore one of the most robust stock-selection tools we have?

A Finance Worldview Rooted in Academic Research Can Be a Handicap

I think it starts with the indoctrination from a formal finance education. 

My own academic training — BS in Finance, MBA, and the CFA designation — devoted little time to momentum. The only program that addressed it meaningfully was the Chartered Market Technician (CMT) designation.

The Unlikely Conversation With a Top Finance Educator Opened My Eyes

The clearest answer I’ve found came from an unlikely source. At the 2019 CMT Association Annual Symposium in New York City, I met Aswath Damodaran, Professor of Finance at NYU Stern and renowned authority on valuation. He told me: “There is no moral high ground with investment philosophies.” He was pointing out that valuation does not guarantee superior results, and that technical approaches like momentum are no less legitimate.

Still, in practice, many traditionally trained investment managers avoid the topic. Perhaps they see it as “too easy” or inconsistent with their worldview. Even celebrated investors like Warren Buffett have dismissed momentum. But the data tell a different story.

The Familiar Conversation With a Smart Manager

In fact, during another recent conversation, a manager testing momentum strategies initially found disappointing results. I suggested loosening position-size caps and relaxing sector constraints. Why? Because for momentum to work, you must let winners run and cut losers quickly. This asymmetry requires moving away from strict index characteristics to capture true trends. 

Later, he reported that his backtests were outperforming all the other strategies he was working on — including value, profitability, quality, growth and low volatility. My response: “Not surprising.”

This is a familiar pattern. Rather than insisting momentum is superior, I now prefer a Socratic approach: I encourage skeptical analysts to test it themselves. Inevitably, the data convince them.

Drawbacks to Momentum

With all the advantages momentum offers, it isn’t without drawbacks. Momentum strategies often generate higher turnover, which can increase trading and tax costs. They may also suffer drawdowns during regime shifts, when prevailing trends reverse or lose strength. 

For these reasons, I view momentum best as a satellite strategy — an important component within a diversified portfolio, but not the core.

Always Be Learning, It’s More Fun

Of course, I don’t claim to have all the answers. I continually learn valuable insights from these researchers, and I welcome new perspectives that help me better serve my clients over the long term.

So if you’re still skeptical about momentum — or dismiss the very word — take another look. Examine the data. Test it yourself. Don’t trust. Verify.

To dig deeper into the academic backbone of momentum, there’s no shortage of rigorous research showing its power across time, markets, and asset classes. Here are some of the most influential studies:

• Jegadeesh & Titman (1993, 2001): The landmark papers that proved momentum stocks — winners over the past 6–12 months — tend to keep winning.
• Carhart (1997): Introduced the four-factor model, cementing momentum as a core driver of returns.
• Rouwenhorst (1998): Showed momentum isn’t just a U.S. phenomenon — it works globally.
• Moskowitz & Grinblatt (1999): Demonstrated momentum is powerful even at the industry level.
• Asness, Moskowitz & Pedersen (2013): Proved momentum applies everywhere — stocks, bonds, commodities, and currencies.
• Fama & French (2008): Called momentum “the premier anomaly,” even as champions of market efficiency.

I’d love to hear your perspective. Do you use momentum in your process, or do you think it’s overrated? Share your thoughts.