CHAPTER 3Momentum Investing Is Not Growth Investing

“The dumbest reason in the world to buy a stock is because it's going up.”

—Attributed to Warren Buffett1

We use the term momentum to mean a continuation of past relative returns—past winners tend to be future winners, while past losers tend to be future losers. Practitioners often refer to this class of strategies as relative strength strategies, which have been around for a long time. In fact, Robert Levy published a paper in 1967 called “Relative Strength as a Criterion for Investment Selection.” Mr. Levy outlines his conclusion: “The profits attainable by purchasing the historically strongest stocks are superior to the profits from random selection.”2 Oddly enough, research on relative strength strategies went dormant following Levy's contribution. What happened? The efficient market hypothesis happened.


As we alluded to in Chapter 2, the efficient market hypothesis (EMH) was developed at the University of Chicago in the 1960s and 1970s. The EMH hypothesis subsequently flourished across academia. Under the semi-strong form interpretation of the EMH, asset prices reflect all publicly available information so that there is no way for investors to consistently outperform a randomly selected basket of securities after controlling for risk. Or as EMH proponent Burton Malkiel so eloquently put it in his 1973 classic, A Random Walk Down Wall Street: “A blindfolded monkey throwing ...

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