Introduction
Momentum investing and value investing are two of the most widely used — and fundamentally different — approaches to stock selection and portfolio management. Both strategies are backed by academic research and have generated long-term outperformance relative to broad market indices. Yet, they rely on opposite assumptions about how markets work and where opportunities arise.
Understanding the mechanics, rationale, strengths, and weaknesses of each strategy is essential for investors who want to build a balanced portfolio or tilt toward a specific style.
Definitions
Momentum Investing
Momentum investing is a strategy that involves buying assets that have recently performed well and selling those that have performed poorly, under the assumption that price trends tend to persist in the short to medium term.
Core Principle:
“Winners keep winning, and losers keep losing — for a while.”
This strategy assumes that investors underreact to new information, creating predictable price drifts.
Value Investing
Value investing is a strategy that focuses on buying securities that appear to be undervalued relative to their intrinsic value, often based on fundamentals such as earnings, book value, or dividends.
Core Principle:
“The market overreacts in the short term but gets it right in the long term.”
This approach assumes that prices revert to fundamental value, creating opportunities when assets are temporarily mispriced.
Key Metrics Used
| Strategy | Typical Indicators |
|---|---|
| Momentum | 6–12 month total return, relative strength |
| Value | Price-to-Earnings (P/E), Price-to-Book (P/B), Dividend Yield, Free Cash Flow Yield |
How Each Strategy Works
Momentum Strategy Workflow:
- Rank securities based on past performance (usually 3-, 6-, or 12-month returns)
- Go long top performers, short or avoid bottom performers
- Rebalance periodically (monthly or quarterly)
- Hold until trend fades
Momentum often thrives in trending markets and during market recoveries.
Value Strategy Workflow:
- Screen for undervalued companies based on valuation multiples
- Analyze fundamentals: earnings consistency, balance sheet strength, competitive advantage
- Buy when price < intrinsic value estimate
- Hold long-term, often waiting years for convergence
Value investing performs best in rebound phases following market corrections and when interest rates are rising.
Historical Performance
Academic studies (e.g., Fama-French) have demonstrated that:
- Value stocks historically outperform growth stocks over long periods, though not consistently year-to-year
- Momentum strategies generate positive excess returns across asset classes, especially equities, with low correlation to value
Long-Term Excess Returns (U.S. Stocks)
| Strategy | Annual Alpha (vs Market) | Volatility | Drawdowns |
|---|---|---|---|
| Value | ~2–4% | Moderate | Sharp in tech booms/busts |
| Momentum | ~4–6% | High | Vulnerable to reversals and crashes |
Source: AQR, Fama-French Data Library, Research Affiliates
Psychological Basis
Value Investors Capitalize on:
- Overreaction and pessimism
- Short-term fear or noise
- Behavioral biases like loss aversion
They go against the crowd, buying unloved stocks.
Momentum Investors Exploit:
- Underreaction to new information
- Confirmation bias
- Herd behavior and FOMO
They go with the crowd, but do so systematically.
Factor Overlap and Correlation
| Factor Relationship | Comment |
|---|---|
| Value vs Momentum | Negatively correlated (~ -0.3 to -0.6) |
| Blend Opportunity | Low correlation means combining them reduces volatility |
| Diversification Effect | Offsetting cycles smooth long-term returns |
A multi-factor portfolio that includes both styles can outperform either in isolation — and reduce drawdowns during style-specific downturns.
Common Risks
Value Investing Risks
- Value Traps: Stocks may be cheap for good reason (e.g., declining business)
- Cyclicality: Value underperforms during long bull runs, especially growth-driven ones
- Underperformance Periods: Example – 2009 to 2020
Momentum Investing Risks
- Trend Reversals: Sudden market shifts wipe out gains
- High Turnover: Leads to transaction costs and tax inefficiency
- Crash Risk: Momentum strategies tend to suffer in sharp rebounds (e.g., 2009, early 2020)
Example Portfolios
Momentum Portfolio
| Ticker | Holding | 12M Return (%) |
|---|---|---|
| TSLA | Tesla Inc. | 50%+ |
| NVDA | NVIDIA Corp | 100%+ |
| META | Meta Platforms | 80%+ |
Selected for recent price performance; subject to quick turnover.
Value Portfolio
| Ticker | Holding | P/E | Dividend Yield |
|---|---|---|---|
| JPM | JPMorgan Chase & Co. | 10 | 3.1% |
| CVX | Chevron Corp. | 9 | 4.2% |
| MMM | 3M Company | 8 | 6.0% |
Selected for low valuation, cash flow, and yield; intended for long-term holding.
Popular ETFs
| Strategy | ETF Name | Ticker | Issuer |
|---|---|---|---|
| Momentum | iShares MSCI USA Momentum Factor ETF | MTUM | BlackRock |
| Momentum | Invesco DWA Momentum ETF | PDP | Invesco |
| Value | Vanguard Value ETF | VTV | Vanguard |
| Value | iShares Russell 1000 Value ETF | IWD | BlackRock |
These ETFs allow investors to access factor tilts systematically, without handpicking stocks.
When Each Strategy Works Best
| Market Condition | Momentum | Value |
|---|---|---|
| Bull Market (Early Phase) | ✅ Moderate | ✅ Strong |
| Bull Market (Late Phase) | ✅ Strong | ❌ Weaker |
| Market Crash | ❌ Risky | ❌ Risky |
| Post-Crash Recovery | ❌ Lagging | ✅ Strong |
| Sideways/Flat Market | ❌ Unreliable | ✅ Stable |
Timing matters — hence many investors alternate or blend both styles over time.
Strategy Blending: The Smart Beta Approach
Many portfolio managers now use multi-factor models that include both value and momentum signals. These blended strategies benefit from:
- Lower volatility
- Reduced style risk
- Higher Sharpe ratios
Blended ETFs and quant funds are now commonplace, particularly those based on AQR, Dimensional, or Vanguard Multifactor methodologies.
Related Concepts
- Growth Investing – Antithesis of value; focuses on future earnings growth
- Technical Analysis – Often overlaps with momentum principles
- Quantitative Models – Use momentum and value as variables in scoring systems
- Factor Timing – Rotating between value and momentum based on macro environment
- Rebalancing – Especially important in momentum due to fast turnover
Final Thoughts
Value and momentum investing are two sides of the same coin: exploiting inefficiencies in the market — just in opposite directions.
- Value buys what’s cheap, believing the market will correct mispricing.
- Momentum buys what’s strong, believing trends have inertia.
Each strategy has its own cycle, strengths, and risks. The choice between them depends on:
- Your risk tolerance
- Time horizon
- Market outlook
- Belief in mean reversion vs trend continuation
Many of the most successful investors and asset managers combine both in diversified portfolios. Whether you lean toward undervalued fundamentals or price-based signals, understanding these styles is crucial to making informed, strategic investment decisions.
You don’t have to choose sides — you can harness the power of both.
