- 1Buying past 12-month winners and selling losers earns ~1% per month (12% annually)
- 2The strategy works best with a 12-month lookback and 1-month skip
- 3Momentum profits are not compensation for risk—they challenge market efficiency
- 4The effect has persisted for 200+ years and across 40+ countries
- 5Jegadeesh & Titman confirmed their original findings 30 years later in 2023
#The Paper at a Glance
Title: Returns to buying winners and selling losers: Implications for stock market efficiency
Authors: Narasimhan Jegadeesh and Sheridan Titman
Published: Journal of Finance, 1993
DOI: 10.1111/j.1540-6261.1993.tb04702.x
This paper is arguably the most important empirical finding in modern finance after Fama and French's value and size factors. Jegadeesh and Titman showed that the simplest possible strategy—buying stocks that went up and selling stocks that went down—generates massive profits.
#What the Paper Found
The Core Discovery
Jegadeesh and Titman sorted all NYSE and AMEX stocks by their past 3-to-12-month returns, then measured how those stocks performed over the next 3-to-12 months.
The result was stunning:
| Lookback Period | Holding Period | Monthly Return |
|---|---|---|
| 3 months | 3 months | 0.73% |
| 6 months | 6 months | 0.95% |
| 12 months | 3 months | 1.01% |
| 12 months | 12 months | 0.68% |
The optimal strategy: buy stocks with the highest 12-month returns (skipping the most recent month) and hold for 3-6 months.
The Skip Month
One critical detail: the most recent month is skipped. Why? Because of the short-term reversal effect—stocks that went up a lot in the last month tend to mean-revert slightly. Skipping this month eliminates the noise and improves returns.
Economic Magnitude
A long-short momentum portfolio (buy top decile, short bottom decile) earned approximately 12% per year during the 1965-1989 sample period. This is enormous—larger than the market risk premium itself.
#Why Momentum Works
Jegadeesh and Titman explored several explanations:
1. It's NOT Risk Compensation
Unlike value (which may be compensation for distress risk), momentum doesn't have a clean risk-based explanation. The CAPM beta of momentum portfolios is actually negative—momentum is not riskier than the market in any traditional sense.
2. Behavioral Underreaction
The most accepted explanation: investors underreact to new information. When a company reports strong earnings or announces a positive catalyst, the stock price adjusts—but not enough. It takes months for the full implications to be priced in.
3. Delayed Overreaction
An alternative view: momentum works because investors overreact to trends, pushing prices beyond fair value. This explains why momentum profits partially reverse after 12-18 months.
#The Risk: Momentum Crashes
Momentum is not a free lunch. The strategy experiences severe crashes during market reversals:
| Crash Period | Momentum Loss |
|---|---|
| 1932 (Depression recovery) | -74% in 2 months |
| 2009 (GFC recovery) | -55% in 3 months |
| 2020 (COVID recovery) | -40% in 1 month |
These crashes happen when markets reverse sharply: beaten-down stocks (past losers) surge while previous winners collapse. This is why momentum is combined with other factors, not used in isolation.
#30 Years Later: Does It Still Work?
In 2023, Jegadeesh and Titman published a follow-up paper reviewing 30 years of out-of-sample evidence. Their conclusion:
"Momentum profits have remained large and significant in the three decades following our original study."
The effect has been documented across: - 40+ countries (Asness, Moskowitz & Pedersen, 2013) - 200+ years of U.S. data - Multiple asset classes (bonds, currencies, commodities) - Post-publication periods (no decay after discovery)
#How This Applies to Our Rankings
Momentum is our second-highest weighted factor at 25% in the composite score.
We calculate momentum using the standard 12-1 month approach pioneered by Jegadeesh and Titman: 1. Measure each stock's total return over the past 12 months 2. Skip the most recent month (to avoid short-term reversal) 3. Rank all stocks by this measure
The 25% weight reflects momentum's strong return premium while acknowledging its crash risk. Combined with our other five factors—especially low volatility and profitability—the crash risk is significantly mitigated.
#Academic Source
Jegadeesh, N., & Titman, S. (1993). "Returns to buying winners and selling losers: Implications for stock market efficiency." Journal of Finance, 48(1), 65-91.
Last updated: February 1, 2026