Here is a simple definition of Momentum:
Momentum – recent winners tend to continue winning while recent losers tend to continue losing; in other words, persistence in performance.
I’m consistently asked the same question – Why Momentum? If your reading this and have dealt with one of my politically correct answers, I apologize, please replace that with the following:
Momentum works better. If your objective is to make money in the markets, momentum is the solution. I’m biased and transparent in that bias, but at this state of my professional development, it’s my only logical and emphatic answer.
Are there other anomalies* worthy of exposure? Yes. I just can’t wrap my head around them like I can momentum. To be honest, I don’t care to, they’re not as powerful. In addition, to measure momentum, I need closing price data – nothing else – hard to manipulate that. Pretty attractive to a firm built on the mantra – Simple Beats Complex.
There is one caveat to my conviction, but it applies to any method of market exposure. It should be systematic. The thing that prevents long term investors from realizing the eventual benefits of any market anomaly is behavior. Use an evidence based system to mitigate that risk.
*A market anomaly (or market inefficiency) is a price and/or rate of return distortion on a financial market that seems to contradict the efficient-market hypothesis (definition from Wikipedia)