Momentum & Contrarian Strategies

Momentum Strategy

Concept: Buy past winners, sell past losers

Timeframe: 6-12 months

Returns: ~1% monthly (Jegadeesh & Titman, 1993)

Behavioral Basis: Underreaction to news (conservatism bias) causes gradual price adjustment

Why Momentum Works

Anchoring: Investors anchor on old prices, slow to adjust

Confirmation Bias: Seek info confirming initial view, ignore contrary evidence

Herding: Success attracts followers, pushing prices higher

Disposition Effect: Winners held longer, losers sold—creates demand imbalance

Contrarian Strategy

Concept: Buy past losers, sell past winners

Timeframe: 3-5 years

Returns: Value premium ~3-5% annually

Behavioral Basis: Overreaction to bad news creates bargains

Why Contrarian Works

Overreaction: Extrapolate recent performance too far

Representativeness: Recent "loser" seems like permanent loser

Loss Aversion: Panic selling of losers pushes too low

Mean Reversion: Extreme performance reverts toward average

Combining Strategies

Short-term (6-12 months): Momentum dominates
Long-term (3-5 years): Contrarian/value dominates

Optimal: Momentum for 6-12 months, then rotate to contrarian

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