Momentum investing: the empirical evidence

Key Markets report for Friday, 10 July 2026

Today’s article is a followup to this week’s posts on trend following. “Exhibit 3” that corroborates the merit of the strategy and casts doubt upon asset valuation fundamentals and value investing. It emerges from the very performance of the momentum investing strategy.

Suppose you systematically invested in top performing stocks, regardless of what you thought about the companies in question, about their stock price, their products or their management teams… If you did that, you’d be on to something very powerful. This is what we call the momentum strategy: a variant of trend following that seeks to systematically pick top performing stocks and hold them for as long as they outperform. How well does the strategy work? A very extensive empirical study covering over a century of data turned up astonishing results.

Over a century of data, 18 global markets…

London Business School researchers Elroy Dimson, Paul Marsh and Mike Staunton analyzed stock price history starting from the year 1900. They constructed investment portfolios by selecting 20 top performing stocks in the previous 12 months from among the UK’s 100 largest publicly trading firms, and compared their performance to portfolios of 20 worst and 60 middle performers, re-calculating the portfolios every month.

They found that the lowest-performing stocks would have turned £1 invested in 1900 into £49 by 2009. By contrast, the top performers would have turned £1 into £2.3 million, a 10.3% difference in compound annual rate of return over a 109-year period!

When Dimson, Marsh and Staunton included in their study ALL of the London stocks from 1955 onwards, the gap was even wider: the top quintile generated a compound annual rate of return of 18.3% versus 6.8% return for the bottom quintile.

The researchers found the strategy to be “striking and remarkably persistent.” It proved successful in 17 out of 18 global markets studied, with data going back to 1926 for North America and to 1975 for larger European markets. The only exception was Japan, where the results were based only on the post-2000 data – the period that coincided with a protracted bear market in Japanese equities.

Hard to argue-with conclusion

Thus, Dimson, Marsh and Staunton included a massive chunk of stock market history across 18 global stock markets and gave us irrefutable evidence that trends really are the most potent driver of investment performance over the long term. This principle has held true through the two world wars, the 1930s depression, 1970s inflation, Korean War, Vietnam War, the collapse of the Communist Block, the rise of China, 911 terror attacks and the global war on terror. The century covered by this study has been one long roller-coaster for the global capital markets and through all of it, powerful trends prevailed as dominant drivers of investment performance.

It’s the collective human psychology…

Indeed we see market trends/momentum at work in the markets all the time in assets like Nvidia, Alphabet, Microsoft, LVMH, Samsung, Apple, Amazon, Tesla and many, many others. These are not aberrations but real manifestations of collective human psychology at work. We saw the same in commodity markets like Silver, Palladium, Cobalt and Cocoa and a number of cryptocurrencies, most notably Bitcoin.

The “valuation” of all these securities hardly matters and this should be most obvious in the case of cryptocurrencies since they have no conventionally valid basis for any sort of rational valuation. In spite of that, they all gave rise to Large Scale Price Events (LSPEs) which all unfolded as trends. Given that these emanate from the collective human psychology, which is unlikely to change any time soon, we can be near-certain that we’ll continue to see Large-Scale Price Events and market trends indefinitely in the future, which should be a guiding principle for investors.

In today’s circumstances however, this reassurance is balanced by the challenge of very high volatility and the strategy needs to be adapted to these circumstances, most importantly by reducing risk exposure as volatility in the markets increases. Psychologically, this is more difficult than it seems: high volatility comes with greater potential for gains which is often difficult to resist. However, we must always keep in mind that preserving our portfolios, the “dry powder” of market speculation, is a higher priority than maximizing gains. These are times to “drive in the slow lane.”

To learn more about TrendCompass reports please check our main TrendCompass web page. We encourage you to also have a read through our TrendCompass User Manual page. For U.S. investors: an investable, fully managed portfolio based on I-System TrendFollowing is available from our partner advisory (more about it here).

Today’s trading signals

With yesterday’s closing prices we have the following changes for the Key Markets portfolio: