Talk Your Book: Why Momentum Investing Works

Momentum investing is one of the best-documented market anomalies, yet it remains deeply uncomfortable for most investors. As John Lewis of Nasdaq Dorsey Wright puts it on this episode of Animal Spirits, the basic premise sounds almost too simple to work: "Why do you like this stock? Because it's going up. And if it goes up more, I like it even more." That discomfort, he argues, is exactly why the strategy delivers a persistent edge—and why it works best as a systematic, rules-based process rather than a discretionary bet.

Why Momentum Feels Wrong but Works

The core challenge with momentum is psychological. Value investing makes intuitive sense: buy a dollar for 70 cents. Lewis notes that "value made sense to me immediately," while momentum took much longer to click. The behavioral explanation is the key. Momentum exploits the tendency of market participants to underreact to new information—earnings surprises, product launches, secular trends—and then to overreact as the trend gains confirmation. Stock prices contain real signal, especially over intermediate time horizons of one to three years. As Lewis puts it, "The market is pretty smart. It usually gets it right." Companies with strong price momentum tend to also have strong business momentum, whether from a new product cycle, a secular tailwind, or improving fundamentals that the broader analyst community has not yet