Leaders vs. Laggards: What the Evidence Says

What decades of research say about buying recent winners instead of recent losers, why it tends to work, and a real six-month test from our data that shows it does not work every time.

The momentum effect

Researchers have studied relative strength for decades under the name momentum. A widely cited 1993 study by Narasimhan Jegadeesh and Sheridan Titman found that U.S. stocks with the best returns over the past 3 to 12 months tended to keep outperforming the worst performers over the following 3 to 12 months. Many later studies found similar effects in other countries and asset classes.

That is the logic behind “buy leaders, avoid laggards.” Recent winners have a tendency, not a guarantee, to keep winning for a while.

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