The two factors that disagree beat either one alone

A friend told me he had picked his factor and was done.

Momentum, he said. He had compared the backtests, momentum's risk-adjusted return beat value's, so why hold the weaker one.

Reasonable. Then I showed him the blend of the two he had just ranked against each other.

Half in value, half in momentum. On the same illustrative numbers, value scores a Sharpe of 0.29 and momentum 0.50. You would expect a mix to land somewhere between them, closer to 0.40.

It lands at 0.79. Above both. And it is not a rounding error.

Here is why, and it is the least intuitive bit. Value buys what has fallen out of favour. Momentum buys what is already climbing. By construction the two lean in opposite directions, and their return streams have carried a correlation of roughly -0.50 across decades and markets (Asness, Moskowitz and Pedersen, "Value and Momentum Everywhere", 2013).

Negative correlation is the rarest thing in a portfolio. It means when value is having a bad year, momentum is often having a good one. Their weak spells do not overlap. So the combined return is just the average of the two, but the combined swing shrinks to about half of either factor on its own. Averaged return, halved risk. That is the whole reason the blend clears both.

Most things you own crowd together exactly when you need them apart. Correlations rush toward one in a crisis. Value and momentum lean the other way on purpose, not on mood.

The lesson is not value, and it is not momentum. It is that diversification is a count of disagreements, not a count of names. The edge my friend was hunting was never picking the winner. It was refusing to choose