Josef Lakonishok on the importance of valuations on momentum investing

We tried to see if valuations also matter within momentum.  So actually what we did, we looked at companies with high momentum, low momentum, deciles, quintiles, whichever you want to do, and then we looked at the valuations.  Let’s call it momentum factor.  So when the momentum factor is cheap, it kind of tends to do well.  But when the momentum factor is crazy expensive, the high momentum guys are very expensive relative to low momentum guys, subsequently the return on this momentum factor is nothing to write home about.  And I actually find it to be a very interesting finding because valuations always matter.  We know that valuations matter when you compare value to growth.  Valuations matter when you compare high momentum to low momentum.  I’m sure that it matters when you compare large companies to small companies.  So for me it is just another indication that you cannot run away from valuation.

~ Josef Lakonishok, LSV Asset Management, "Value For the Long Run" roundtable discussion, October 28, 2020