Why Momentum Investing works?
Forget "value" vs "growth." The only thing that actually makes you money is price going up. Here's the data.
Here's a thought experiment. You find two stocks:
Stock A is "undervalued." Great fundamentals, cheap price-to-earnings. Every finance bro on Twitter says it's a hidden gem. It's been sitting flat for 18 months.
Stock B has no special story. But its price has been climbing steadily for 6 months. Every week, a little higher.
Which one makes you money?
That's the entire thesis of momentum investing in one sentence. Labels like "value" or "growth" or "quality" are just adjectives. The only thing that puts cash in your account is the stock entering a phase where the price is actually rising. Momentum is just the word for that phase.
The numbers are absurd
A 10-year study (2016–2026) tracked the top 250 stocks on the Indian market, sliced by different "factors" — value, quality, low volatility, growth, and momentum. The question: which style gives you the most return for each unit of risk you take?
| Factor | 10Y CAGR | Risk efficiency |
|---|---|---|
| Momentum | 24.9% | 1.28x |
| Quality | ~19% | ~1.05x |
| Low volatility | ~17% | ~0.95x |
| Value | ~16% | ~0.85x |
| Growth | ~15% | ~0.80x |
| Benchmark (Nifty 250) | 13.7% | — |
Source. Momentum and benchmark are exact figures from the study; other factor numbers are approximate ranges from the same dataset.
Risk efficiency means return per unit of risk. Momentum at 1.28x means for every 1% of volatility you endure, you get 1.28% in returns. Value sits around 0.85x — you're eating more risk for less reward. And this isn't just an India thing. Data from the US, Europe, and emerging markets over multiple decades shows the same pattern.
The low-PE trap: real examples
Here's where it gets personal. Let's look at two of India's most "recommended" stocks right now — September 2026:
| Stock | PE ratio | 1-year return | 52-week range |
|---|---|---|---|
| ITC | ~16.9 | −33% | ↓ 426 → 269 |
| HDFC Bank | ~15.6 | −22% | ↓ 1,020 → 731 |
PE and price data as of September 2026 via Yahoo Finance and GuruFocus.
Both stocks have PEs below 17. Every value investor's screening tool lights up green. "Undervalued! Buy!" And yet — ITC is down a third from its high. HDFC Bank has dropped from 1,020 to 731. If you bought either of these a year ago because they looked cheap, you've been sitting on dead money (or worse) while momentum stocks compounded.
That's the trap. A low PE tells you the stock is cheap relative to its earnings. It doesn't tell you when the price will start moving. It could be cheap for another 2 years. Meanwhile, a momentum investor never touches these stocks in this phase — no upward trend, no entry. The moment ITC or HDFC Bank starts actually climbing with volume, that's when they enter a momentum portfolio. Not before.
Why does this work?
Because humans are predictable. We herd. When a stock starts moving up, more people notice it, more people buy it, and the price keeps climbing. We also hate admitting mistakes — so we hold losers too long and sell winners too early. Momentum strategies exploit both of these biases.
There are no "momentum stocks." There are only stocks that are currently in a momentum phase. Any stock — undervalued, overvalued, whatever — has to enter a momentum phase before it gives you returns.
That undervalued gem sitting flat for 18 months? It might be a great company. But until its price starts actually moving, it's dead money in your portfolio. The moment it enters a momentum phase, that's when you buy.
Passive vs active: the lazy trap
Momentum indexes exist (Nifty200 Momentum 30, etc.), and they sound great on paper. The problem? They rebalance every six months. That's like checking your GPS once during a road trip — you're going to miss a lot of turns.
In those six months, stocks that have lost momentum are still sitting in your portfolio, dragging returns down. The solution is active momentum with more frequent rebalancing — weekly or monthly — plus risk management rules that pull you out of positions when the trend breaks. The data across multi-decade periods globally shows that active, rule-based momentum significantly outperforms the passive "set and forget" version.
So what do you actually do?
- Stop labeling stocks. Forget "this is a value pick" or "this is a growth story." Ask one question: is the price trending up right now?
- Buy strength, sell weakness. If a stock is climbing with volume, that's your signal. If it's dropping or going sideways, stay out — regardless of how "cheap" it looks.
- Rebalance often. Don't marry your holdings. Check momentum weekly. Rotate into what's working, exit what isn't.
- Remove emotions. The entire point of rule-based momentum is that you don't need to "figure out" the market. You follow the trend, period.
Disclaimer: This is educational content, not financial advice. Do your own research before investing. Past performance doesn't guarantee future results.