Momentum investing is one of the rare ideas in finance that is simple to understand, difficult to execute, and remarkably persistent. Across markets, countries, asset classes, and decades, the same pattern keeps appearing: assets that have performed well recently tend to keep performing well, and assets that have performed poorly tend to keep underperforming – at least for a time.
What Is Momentum?
In its most basic form, momentum is the tendency for price trends to persist.
A classic momentum rule looks like this:
- Buy assets with strong returns over the past 6 – 12 months
- Avoid or sell assets with weak recent returns
- Rebalance periodically
Momentum does not try to estimate intrinsic value. It does not forecast earnings or analyze balance sheets. Instead, it relies on one observable fact: price itself contains information.
Momentum answers a very practical question:
What is the market already rewarding right now – and what is it abandoning?
Importantly, momentum is not day trading and not random guessing. It operates over intermediate time horizons – long enough for trends to form, short enough to avoid full mean reversion.
Academic Evidence: Momentum is one of the Strongest Effects in Finance
Momentum is not a recent discovery, nor a marketing invention. It is one of the most extensively studied and validated anomalies in financial economics.
The modern academic foundation of momentum investing traces back to the landmark research of Narasimhan Jegadeesh and Sheridan Titman, whose 1993 paper demonstrated that stocks with strong past performance consistently outperformed those with weak past performance across U.S. markets.
Since then, momentum has been documented:
- Across international equity markets
- In commodities, currencies, bonds, and futures
- Over more than a century of historical data
Even frameworks designed to explain market returns, such as those developed by Eugene Fama, have had to acknowledge momentum as a major return driver – despite its tension with traditional efficient market theory.
Among all known market anomalies, momentum stands out for three reasons:
- Strength – historically high risk-adjusted returns
- Consistency – appears across markets and time
- Robustness – survives transaction costs and institutional trading
This is why momentum is widely used by hedge funds, quantitative asset managers, and institutional investors – even when it is not openly discussed.
Why Human Behavior Drives Trends
If momentum works so well, the obvious question is: why hasn’t it been arbitraged away?
The answer lies in human behavior.
Markets are not driven purely by rational calculations. They are driven by people and institutions that:
- Underreact to new information
- Herd into winning assets
- Anchor to prior beliefs
When new information arrives – such as improving fundamentals, technological breakthroughs, or macro shifts – markets tend to adjust slowly, not instantly. Prices move in stages as more participants gradually accept the new reality.
At the same time, success attracts attention:
- Rising prices draw media coverage
- Media coverage draws investors
- Investors draw more capital
- More capital pushes prices higher
This feedback loop creates trends that persist longer than classical theory predicts.
Ironically, even professional investors contribute to momentum:
- Buying what has already gone up to avoid underperformance
- Avoiding declining assets to reduce risk
- Chasing confirmation rather than acting early
Momentum exists not because investors are unintelligent – but because they are human.
The Key Insight
Momentum investing works because:
- Information spreads gradually
- Behavior reinforces trends
- Institutions move slowly
- Prices reflect psychology as much as fundamentals
Momentum investing makes no assumptions about future price direction. It remains invested while the prevailing trend is upward and exits when objective signs of weakness appear.
Understanding this principle is critical, because momentum is not about predicting the future – it is about systematically aligning with what is already working.