There’s a little-known pattern that has existed in markets since at least 1801.

One (relatively simple) factor that leads to significant abnormal returns.

And most investors are completely blind to it.

Humans are irrational

Chances are, you know someone who’s afraid of flying.

They will spend 24 hours in a car instead of taking a 4-hour flight, despite the fact that it’s far more dangerous to drive than it is to fly.

Or imagine you’re at a casino, watching someone play roulette.

The ball has landed on red five times in a row. Where does everybody place their next bet?

On black, of course. After all, it’s overdue. Isn’t it?

But you know the reality: Each spin is completely independent from the last. The odds haven’t changed at all.

The flying and roulette examples are illustrative. They teach us something about behavior.

Humans are irrational. People make decisions based on emotion, not logic.

And it’s no different when it comes to investing.

Why momentum investing works

Emotion, not logic, moves the markets.

In a groundbreaking paper, Daniel Khaneman et al. found that stock prices frequently overreact or underreact to new information.

Of course, it isn’t the stock prices themselves that were overreacting or underreacting, but the investors who were trading them.

Investors suffer from two cognitive biases:

• The Anchor Effect: Investors rely on the first piece of information they receive, like an initial stock price. “Anchored” to this initial number, investors tend to underweight new information. This leads investors to think things like Nvidia can’t be worth $900 per share since it was worth just $400 per share less than a year ago, regardless of how strong the underlying fundamentals.

• Prospect Theory: Investors are disposed to sell their winners and hold their losers, despite obvious reasons to do the opposite (the stock price rose because it is a good stock to own). This is known as “cutting the flowers and watering the weeds.” If the fundamentals support it, Nvidia may in fact be a better investment at $900 per share than it was at $400.

Together, these two biases create a large mental hurdle investors need to overcome to hold or buy stocks whose prices have appreciated, regardless of how strong the reasons for their appreciation (such as improving fundamentals).

That’s why momentum investing works.

Since almost all investors suffer from these cognitive blindspots, the best stocks are frequently undervalued by the market, leaving additional room for future price appreciation.

And therein lies our opportunity.

About Delta Options

Launched in July 2022, our momentum-based strategy has returned nearly 250% by the end of 2024.

Over that time, we’ve added 62 picks to the portfolio.

A $1,000 investment in each of these picks would be worth over $216,000 at the time of this writing, outpacing the S&P by a wide margin: