Momentum is one of the most powerful and persistent market anomalies. The evidence supporting this assertion is overwhelming. The idea that buying past winners and selling past losers (from 1-12 months) can lead to outperformance, though, is still bewildering to many. It’s not intuitive, especially for value investors, to believe that past performance in security prices can actually be indicative of future results.

But indeed it is. That is not to say that momentum investing is “easy” or that it “always works.” Far from it. It must be executed in a systematic fashion, with discipline and without emotion. And like value and other anomalies, momentum returns are inherently cyclical. That means there are periods of above-market performance and periods of underperformance.

Therein lies the problem for many investors when it comes to anomalies. They tend to chase performance, reducing or eliminating the benefits of the anomaly itself. The notion is particularly perplexing when it comes to momentum investing because while chasing security prices in a systematic fashion works over time, chasing the return stream from that chasing does not.

An example will make this point clearer.

An investment of $10,000 in 1980 would have grown to $1,176,223 by 2015 in Small Cap Momentum, far outpacing the $268,585 in the Russell 2000 Index (14.2% annualized vs. 9.6%). Meanwhile, a similar investment in Large Cap Momentum would have grown to $816,472 versus a gain of $504,466 in the S&P 500 (13.0% annualized vs. 11.0%).*

(*Note: there are many, many ways to define momentum. In this piece I use the AQR Momentum Index (Large-Cap and Mid-Cap U.S. Equities) and the AQR Small Cap Momentum Index (Small-Cap U.S. Equities). AQR ranks stocks based on their total return over the prior twelve months (excluding the last month) and includes the top 33% of stocks in their indices, weighted based on market cap and rebalanced quarterly. Click here for more detail.)