Believe Buffett? Consider These Funds

While momentum funds can be volatile, academic studies show they can succeed, provided managers work carefully. Once a stock surges, it tends to stay ahead of the market for periods of three to 12 months, according to research by Narasim Jegadeesh of the University of Illinois and Sheridan Titman of the University of Texas. But after 12 months, the winning stocks begin to cool, eventually delivering middling results. Academics say the performance of hot stocks tends to revert to the mean.

Why do winning stocks only enjoy a brief time in the sun? Research suggests a stock may jump after it produces an unexpected earnings gain or other good news. Investors overreact to the new information, pushing the shares to unrealistic heights. Gradually, the market comes to its senses and pushes the stock back down. To profit from a momentum strategy, a fund manager must act quickly, buying as a stock is spurting and selling before the highflyer crashes. Moving at the right time takes a deft touch.

For a classic momentum fund, consider Monetta(MONTX Quote), which returned 4% annually during the past decade, outdoing the S&P 500 by about 1 percentage point. Portfolio manager Robert Bacarella looks for stocks whose prices and trading volumes are rising. After spotting a candidate, Bacarella checks to see if earnings are improving, an indication the shares may continue climbing. "Stocks go up for one reason: because there is buying interest," he says. "My job is to determine whether buying interest will continue going forward."