I’ve always believed that the best way to build long-term returns is through preservation of capital and home runs. You have to be willing to follow the strength, even when it feels uncomfortable. – George Soros
This philosophy, often echoed by legendary macro investor Stanley Druckenmiller, who was a student of Soros, highlights why I prefer to look at where the power is moving right now rather than where value used to be.
If you are like most investors, you probably know the specific sting of the one that got away.
You watch a stock climb 50%, 100%, or 200% from the sidelines, telling yourself it is too expensive to buy now, only to watch it double again.
But at the same time, your capital is tied up in cheap stocks that simply refuse to move, or worse, keep sliding. This cycle of missing the winners and babysitting the losers is the single biggest hurdle to real wealth creation.
In the world of investing, there is a persistent anomaly that defies the classic buy low, sell high mantra.
This is known as momentum.
While many value investors spend years searching for bargains in the bargain bin, I prefer to focus on the winners. These are the stocks that are already climbing and, according to decades of data, are statistically likely to keep going.
This isn’t about chasing green candles for the sake of it. It is a scientifically backed approach to capturing excess returns. In this guide, I will break down why I characterise momentum as the premier factor, how it compares to its peers, and how you can join me in mastering it at the Fink Academy.
What is a factor?
Before we dive into momentum, it is important to understand the language of institutional investing. In stock investing, a factor is a specific characteristic or trait that explains why a group of stocks behaves the same way.
Think of factors like nutrients in food. Just as you look at protein, carbs, and fats to understand a meal’s value, professional investors look at factors to understand a stock’s return profile. Common style factors include the following.
- Value. These are stocks identified as being cheap relative to their fundamentals.
- Size. This is the tendency for smaller companies to outperform large ones over long periods.
- Quality. These companies are selected for their strong balance sheets and stable earnings.
- Momentum. These stocks are identified because they have shown the strongest price appreciation over the last 6 to 12 months.
Beta vs. alpha and why I believe smart beta wins for you
A critical concept for any investor to grasp is the difference between alpha and beta. Traditionally, alpha represents the skill of a manager to beat the market through specific stock picking. Beta, on the other hand, represents the returns generated by broad market exposure.
I recently wrote a compelling analysis for FT Adviser on why beta outperforms alpha for retail investors. In that piece, I highlight a reality I see every day…
Most retail investors struggle to find true alpha because of high fees and emotional investing.
However, as a retail investor, you have a massive advantage that institutional giants do not. Because you aren’t dealing with hundreds of millions or billions in assets under management, you are far more nimble.
You don’t need to hunt for elusive alpha in the same way a hedge fund might.
Instead, you can focus on simply capturing systematic beta and using your agility to risk manage the downside adequately. I argue that instead of chasing stock-picking brilliance, you are better served by joining me in capturing this systematic beta.
Why I’d rather be lucky than right
Technically, what we are doing here could be described as alpha capture. When you systematically pick the strongest stocks in the strongest sectors, you are effectively harvesting the market’s inefficiencies. However, I am generally hesitant to suggest that I possess some mystical alpha.
In my experience, the markets have a way of humbling anyone who thinks they are smarter than the tape.
I would much rather be lucky than right.
By positioning ourselves in the path of the strongest trends, we allow the market to do the heavy lifting for us. If that looks like alpha to an outsider, so be it, but I prefer to view it as being disciplined enough to stay lucky.
Momentum investing is the ultimate way to juice this beta. By following a rules-based approach, you aren’t relying on a lucky guess. Instead, you are harvesting a proven market risk premium that I have optimised for long-term growth.
Momentum as the 30-year heavyweight champion
When looking at the data provided by S&P Global and MSCI, the trend is undeniable. Over the last three decades, momentum has been the single best-performing factor.
Historical data from the MSCI World Momentum Index, which covers roughly 1994 to 2024, shows that momentum has delivered a compound annual growth rate (CAGR) of approximately 11.2%.
In contrast, the broader S&P 500 has averaged closer to 10.3% in the same timeframe.
Crucially, this isn’t just a story about the American market. Indexology, the official blog of S&P Dow Jones Indices, confirms that momentum is a global phenomenon.
Their research shows that the S&P World Ex-U.S. Momentum Index has consistently outperformed its benchmark, with strong performance in countries like Germany and Canada. I use this factor to capitalise on the strongest prevailing trends across the entire global economy.
Comparing momentum against other factors
While value was the darling of the 20th century, there has been a massive shift in how returns are realised over the last 30 years.
- Momentum vs. value. Value has suffered long periods of stagnation, particularly between 2007 and 2020. Momentum has the unique ability to pivot, capturing the growth of Big Tech and AI trends far faster than traditional metrics.
- Momentum vs. size. While small cap stocks theoretically offer higher returns, they often come with crushing volatility. Momentum offers a superior Sharpe ratio, which gives you more bang for your buck for every unit of risk I take.
The holy grail of combining momentum and quality
If momentum is the engine that drives returns, I consider quality to be the steering wheel.
Pure momentum investing can be volatile. When a trend breaks, hot stocks can crash, which is why I recommend multi-factor picking. To truly juice your beta, I use a quality-momentum blend.
Why this duo works
Momentum identifies which stocks the market is currently voting for, while quality ensures those stocks actually have the cash flow to support the move.
In a momentum crash, high-quality stocks tend to fall less than speculative meme stocks with zero earnings. This approach helps you capture the explosive upside of a trending market while maintaining a margin of safety.
Master the trend with me at Fink Academy
Momentum investing is simple in theory but difficult in execution. Most investors fail not because the data is wrong, but because they lack the system to act when it matters. They hesitate during breakouts and hold on during breakdowns. One of the primary techniques I teach to solve this is identifying stage 2 breakouts.
Stage analysis suggests that every stock moves through four phases: the basing phase (stage 1), the advancing phase (stage 2), the topping phase (stage 3), and the declining phase (stage 4). A stage 2 breakout occurs when a stock price breaks out of its sideways base on high volume, typically climbing above its long-term moving average.
This is where the most significant capital gains are made and where momentum is at its strongest.
If you’re ready to stop guessing, stop watching from the sidelines, and start using the same data-driven strategies I see the world’s top hedge funds using, I invite you to visit the Fink Academy.
From mastering the multi-factor quality-momentum screen to identifying those crucial stage 2 entries, the academy provides the tools I’ve gathered to turn you into a systematic, profitable investor.
Stop fighting the trend. Join me and capitalise on it.
Disclaimer. I am sharing my perspective on investing, which involves significant risk. Historical performance of factors is not a guarantee of future results. I always encourage you to conduct your own research.