As an investor that had Graham and Dodd drilled into my DNA, it took me many years to reconcile that you could make money in momentum stocks.  More importantly, it took even longer to learn how to deal with the emotional aspects of being a value investor investing in momentum names.  ("I've got to sell! It is hitting new highs!")

The analytical and emotional dynamics of value and momentum investing are very different.  However, it is all about making money, not dogmatically dismissing something that works.  In the end, the only thing that matters is the size of my account.  And if my account can grow investing in momentum names, I am going to do it.

Motivated by both statistical and psychological evidence on under and over-reaction, we propose two proxies for the degree to which traders under- and over-react to news, namely, the nearness to the Dow 52-week high and the nearness to the Dow historical high, respectively. We find that nearness to the 52-week high positively predicts future market returns. We further show that our proxies contain information about future market returns that is not captured by traditional macroeconomic variables and that our results are robust across G7 countries. In cross-sectional analysis, for stocks that have more likely experienced underreaction (to either good news or bad news) in the past, the momentum effect is about 3 times stronger. For stocks that have more likely experienced overreaction in the past, the value premium is also much stronger.