Momentum Factor Primer

Saturday morning. A friend WhatsApps me a screenshot of a momentum smallcase down 18 percent for the year. He wants to know if momentum stopped working.

Honest version. Momentum is not the stocks that have been rising. It is the stocks that rose for twelve months, paused for one month, and got bought before the screen everyone else is running spotted them. Two letters of the alphabet decide whether you are early or late, and most retail momentum portfolios skip the letter that matters.

Jegadeesh and Titman wrote the rule in 1993. Look back 12 months. Drop the latest month. Rank the universe on the 11-month window. Buy the top decile. Hold for 3 to 6 months. Re-rank. The skip month exists because the latest month tends to reverse. The classic short-term reversal effect. A screen that ranks on "last 12 months" is buying the part the textbook said to sell. Same factor name. Different factor.

The premium is real. On a 20-year window an Indian momentum cohort compounded near 17.8 percent against Nifty 200 TRI at 13.6 percent. About four percentage points a year, paid out lumpy not smooth. The bill is real too. Worst 12-month drawdown of -38.6 percent versus -32.4 for the parent index. Three momentum crashes did most of the damage. Post-GFC junk rally in early 2009 cost -28. The COVID drawdown and reopening rotation in 2020 cost -21. The Feb to Apr 2025 crowding unwind cost -19. Each one ate years of premium in weeks.

So three rules before you sign up. The skip month is the rule, not a detail. Crowding is a tax that grows quietly when everyone runs the same screen. And momentum is a regime trade, not a forever trade. The 5Y rolling hit rate is 68 percent. The other 32 percent of windows is when the strategy is supposed to look broken.

Read the rule, size on the drawdown, sit through the windows that look broken