Facts and Myths About Momentum Investing

Academic research shows that momentum investing is one factor that can be used to “beat the market” over time. But there’s a lot of misunderstanding and false information being spread about momentum investing, according to one of its “discoverers” Clifford Asness of AQR Capital. In this paper written with several others he reviews the research and exposes ten myths about momentum investing. Go to the link for a summary of the paper, then click on “Download this Paper” if you’re interested in more details.

Momentum is the phenomenon that securities which have performed well relative to peers
(winners) on average continue to outperform, and securities that have performed relatively
poorly (losers) tend to continue to underperform.2
The existence of momentum is a well-established empirical fact. The return premium is evident
in 212 years (yes, this is not a typo, two hundred and twelve years of data from 1801 to 2012) of
U.S. equity data,3 dating back to the Victorian age in U.K equity data,4 in over 20 years of outof-
sample evidence from its original discovery, in 40 other countries, and in more than a dozen
other asset classes.5 Some of this evidence predates academic research in financial economics,
suggesting that the momentum premium has been a part of markets since their very existence,
well before researchers studied them as a science.
However, as momentum strategies have grown in popularity, so have myths around them. Some
of the most common myths are that momentum is too “small and sporadic” a factor, works
mostly on the short-side, works well only among small stocks and doesn’t survive trading
costs. Furthermore, some argue that momentum is best used as a “screen”, not as a regular factor
in an investment process. Others will go so far as to say that momentum investing is like a game
of “hot potato”, implying that it isn’t a serious investment strategy, with no theory or reasonable
explanation to back it up.