The Principle and Risk of the Momentum Strategy
Is the saying 'ride the horse that's running' actually true in the data? And when you ride it that way, at what moment can you get badly hurt?
What Is Momentum?
Momentum is the 'tendency for assets that have recently risen a lot to keep rising for a while, and assets that have fallen a lot to keep falling for a while.' It is the observation that trends persist, like inertia.
The research that widely popularized this phenomenon academically is the paper by Jegadeesh & Titman published in the 'Journal of Finance' in 1993. They reported that a strategy of buying stocks with good past performance (winners) and selling those with poor performance (losers) produced meaningful excess returns over the following 3–12 months.
What Is 12-1 Momentum?
A commonly used approach is '12-1 momentum.'
It ranks winners and losers by the past 12 months of performance, but excludes (skips) the most recent 1 month. The immediately prior month is excluded because short-term reversals (what rose briefly pulling back) are frequent and noisy.
In Jegadeesh and Titman's original research, testing various combinations, all showed positive (+) average returns, at roughly 0.9–1.3% per month. The strongest combination (12-month formation, 3-month holding) had a winner-minus-loser return of about 1.3% per month.
This figure is an academic result from a particular past sample (mainly U.S. stocks). It is before deducting trading costs and taxes, varies by market and period, and there is no guarantee it will be reproduced in the future.
The Momentum Crash: The Biggest Risk
Momentum's fatal weakness is a 'rare but very large collapse,' the so-called Momentum Crash. The 'Momentum Crashes' research by Daniel & Moskowitz laid this out.
Crashes mainly erupt when the market rebounds sharply after a big crash. In a crash, a momentum strategy has already sold the 'losers' that have already fallen a lot, but when the rebound comes, those very losers spring up explosively. As a result, the strategy of buying winners and selling losers suffers a large loss in reverse.
In fact, when the market bottomed and rebounded in the spring of 2009, the winner-minus-loser momentum strategy lost more than 73% in about three months. Even more extremely, in the 1932 Great Depression rebound (June–August), it collapsed by about 91%.
The −73% (2009) and −91% (1932) figures are for an academic long-short strategy that computes past losses including short selling (shorting). It differs structurally from an individual simply holding an asset that has risen, but the lesson—'if the trend reverses sharply, momentum can be badly hurt'—is the same. This article is not investment advice.
Preguntas frecuentes
Q. If I buy a stock that recently rose, will it keep rising?
It was only observed in the past that there is 'a tendency, on average, to persist for a while'; it does not guarantee an individual stock's rise. In particular, in a sharp rebound phase after a big decline, momentum can flip in an instant and lead to a large loss. A trend can break at any time.
Q. Are momentum and trend following the same?
They are similar but different in flavor. The momentum discussed here is closer to a (cross-sectional) concept of ranking many assets and buying the relatively strong ones, while trend following is a (time-series) method that judges whether a single asset is above its own moving average. Both share the assumption that 'trends persist.'
Páginas relacionadas
📋 Los resultados se basan en datos históricos; las rentabilidades pasadas no garantizan rentabilidades futuras.
📋 Este servicio se ofrece con fines educativos para ayudarte a entender la inversión, no como asesoramiento de inversión.