Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency
Read the paperopens doi.org in a new tab
What they found
The paper that made momentum respectable. Using U.S. stocks from 1965 to 1989, the authors sorted stocks by their past 3 to 12 month returns, bought the top decile, shorted the bottom decile, and held for 3 to 12 months. Nearly every combination earned about 1% per month, with the classic 12-month lookback and 3-month hold doing best. The profits were not explained by market risk, and part of them reversed after about a year, hinting at delayed reaction followed by overreaction.
What you can use
- Intermediate-term (3 to 12 month) relative strength is one of the most robust patterns in stock returns.
- Skip the most recent month when measuring momentum; the one-month signal reverses.
- Momentum profits partly reverse after 12 months, so it is a trend-following signal, not a buy-and-hold one.
- The strategy has high turnover and short exposure, so costs matter enormously for retail implementation.
Caveats
Sample ends in 1989 and covers only U.S. equities; later work extended it globally. Gross of transaction costs. Momentum suffers occasional severe crashes (see Daniel and Moskowitz) not visible in this sample's averages.
Tags: momentum, equities, factor, cross-sectional
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.