[[Start here]] → [[expose to return drivers|drivers]] → [[strong stocks beat weak stocks|momentum]] → one year momentum --- The one momentum effect that most stock market investors know about is that the best six month to 12 month winners tend to keep winning. It's as if they have come into fashion and stay in fashion for a whole season. This also seems to work in reverse - the worst losers keep on losing ! Jegadeesh and Titman[^1] in 1993 showed that a strategy of buying recent winners and shorting recent losers generated returns of roughly 1% per month - which was robust across time and markets. Tortoriello’s _Quantitative Strategies for Achieving Alpha_ corroborated this: the top six-month winners held for a year outperformed the market by 3.6%. At Stockopedia we’ve found that our [Momentum Rank](https://www.stockopedia.com/academy/articles/the-momentum-rank/) - which is partially based on 6 month and 12 month share price strength - has been the most powerful of all our individual StockRanks. Portfolios based on this have dramatically outperformed. ![[momentum persists for three to twelve months.png]] But the effect doesn’t last forever. Jegadeesh and Titman (2001) later showed that these profits decay after a year as mean reversion takes over. You can think of this as fashion in financial form - something is cool when just a few of you know about it, but you don’t want to wear the same clothes when everyone else does too! ## Why does this effect happen? Momentum happens because markets underreact initially to new information, which means that new breakouts are underbought. But they then overreact later as more investors pile in due to the bandwagon effect - which over-extends the trend. There is also a phenomenon which I like to call “the drift” - or more officially “Post Earnings Announcement Drift” (PEAD). Essentially companies that surprise to the upside, tend to see their share prices drift in the same direction of the trend. ## **Rules of thumb** - Don’t sell your recent winners too early - their strength often persists. - Be ruthless with your recent losers - weakness will continue. - Don’t overstay the trend - momentum fades beyond a year (unless other factors like quality or value are present). ## **Sources** [^1]: [[Jegadeesh & Titman - Returns to buying winners and selling losers]] - Jegadeesh, N. & Titman, S. (2001). _Profitability of Momentum Strategies: An Evaluation of Alternative Explanations_. _Journal of Finance._ - Tortoriello, R. (2009). _Quantitative Strategies for Achieving Alpha._