Throughout history, we’ve been given many iconic combos. There’s milk and cookies, a staple of countless evenings on the couch. There’s Simon & Garfunkel, who serenaded the world with “Bridge Over Troubled Water.” And then there is momentum and value investing—an unlikely duo, seemingly at odds, and yet arguably stronger together.
So how do momentum and value end up in the same conversation as milk and cookies? First, let’s review both strategies before looking at how the two can work even better together than separately.
Momentum investing rests on a simple idea: Many believe that assets that have performed well recently may tend to keep performing well in the near term, while recent losers may tend to continue their downward trajectory. Rather than getting in the weeds with P/E ratios, DCF analysis or any other fundamental analysis, a momentum investor will generally look at what direction the price is heading and roll with it.
Now this might sound like the investing equivalent of a tarot card reader suggesting that you might get married in 5 years. But the foundation of momentum investing is rooted in deep academic research. In a landmark 1993 study, authors Narasimhan Jegadeesh and Sheridan Titman found that buying past winners and selling past losers produced significant excess returns over three- to twelve-month periods.1 Decades of research since then have confirmed that this effect still holds across markets and asset classes.
Why, after so many years, has this held? Well, it comes down to investor behavior. The market often tends to underreact to good news at first, with investors then leaping onto the bandwagon as a trend becomes obvious. While past performance is no guarantee of future performance and all investing may lose money, that herd effect can push prices higher for months before it wanes.
Value investing seeks to identify companies that are trading below their intrinsic value. These companies typically have low price-to-earnings or price-to-book ratios relative to their fundamentals.
Considered the founding fathers of value investing, Benjamin Graham and David Dodd brought the idea to light in their seminal 1934 work titled Security Analysis. Years later, Warren Buffett took the idea and ran with it, building a multi-billion-dollar fortune by focusing on one simple principle: buying stocks when they trade below their intrinsic value. In other words, buy a dollar for fifty cents, then wait for the market to potentially recognize the valuation gap and close it.
That might sound like an oversimplification, and well, you’d be right. Value investing requires deep fundamental research and conviction. It’s not enough to identify companies on “sale.” You also have to separate the beaten-down stocks from the potential turnaround stories
That right there demands a rigor and fortitude to risk looking wrong before you’re proved right.
After reading those two definitions, it’s not hard to see why people talk about momentum vs value like they are two knights jousting at Medieval Times.
Momentum buys what's already rising, more often than not at premium prices. Value buys what's falling or ignored, precisely because it's cheap. A momentum screen and a value screen will flag completely different stocks. At any given moment, a hot momentum name may look wildly overpriced to a value investor, while a deep-value pick may look like a sinking stone to a momentum trader.
These two strategies are both smart beta factors and tend to take turns in the lead. Momentum strategies typically thrive in steady, trending markets where the winners keep winning. Value tends to do well in recoveries, or the moments after a downturn when battered companies snap back and inexpensive stocks get rerated.
Crucially, momentum tends to crash hard at major turning points in the market. When a long downward trend suddenly reverses, momentum portfolios are still chock full of yesterday’s losers on the short side and winners on the long side. They tend to get whipsawed badly. Value, meanwhile, can show disappointing results during euphoric bull runs when investors ignore fundamentals and chase rising stars.2
In recent market cycles, momentum has often outshone value. A long bull market dominated by a handful of fast-growing technology giants has rewarded trend-followers handsomely. Value, by contrast, endured a famously long stretch in the wilderness. Research from firms like AQR documented that the 2010s delivered one of the worst extended drawdowns for value investing on record, leaving many to wonder whether the strategy had stopped working.3
Look at the bigger picture and the scenario changes. Decades of academic data, including the 1992 foundational research of academics Eugene Fama and Kenneth French, demonstrate that value stocks have historically outperformed momentum issues over the long haul.4 The value premium is one of the most studied and durable patterns in finance. A few rough years, even a rough decade, doesn't erase a century of evidence. In fact, deep underperformance has often preceded strong value rebounds, because the greater the undervaluation, the more upside a stock can offer.
Here's what most “pick a side” arguments miss: the very fact that these factors behave differently is what makes them a powerful pairing.
Because momentum and value tend to outperform at different times, their returns aren't tightly correlated. When one stumbles, the other can often pick up the slack. This is the very point underlying diversification. Including both of these strategies in a portfolio can help reduce the depth and length of the painful stretches that cause investors to abandon a strategy at the worst possible moment.
Momentum's Achilles’ heel is found in the moment of a sharp reversal in the market. That's often the precise moment when value is poised to shine. Put them together and each factor helps compensate for the other’s weakness.
Factor investing means targeting the specific, research-backed drivers of return, including value, momentum, size, and quality. Smart beta strategies put this into practice, constructing rules-based portfolios to capture these factors efficiently and at a lower cost than traditional active management.
Combining factors is the obvious next step.
If you crave growth and can stomach swings: tilt toward momentum but keep a value anchor as a cushion in case of downturns.
If you're patient and value-minded: keep your bargain names but add momentum exposure to help avoid missing extended trends.
If you want balance: a diversified factor approach incorporating both can help deliver a smoother path through full market cycles.
The point isn't to time which factor wins next. It's to own both so you're positioned no matter which way the cycle turns.
Momentum investing and value investing look like opposites because they are. This opposition is their greatest strength in working together. Momentum captures trends; value captures bargains. Held together, they could offset each other's worst moments and can help deliver a smoother, more resilient long-term result than either could alone.
Explore how we think about momentum, value, and other factor-based investing strategies.