Momentum earns a fortune on paper. The teardown is about how much of it survives contact with the real world.

A backtest is generous in a way real life is not. It trades for free, pays no tax, and never flinches. Momentum, more than any strategy here, exploits all three of those fictions, because its edge comes precisely from trading a lot. So the honest question is not what it returned, but what a real investor would have been left holding.

The relentless turnover was the real toll

Recall from the overview that almost no stock stayed in the basket even a third of the time. Flip that around and it means you replaced most of the portfolio every single year, chasing the new leaders as the old ones faded. In a live account that is a stream of short term capital gains taxed at the harshest rate, plus brokerage and spread on every churn. None of it shows on the backtest, and all of it comes straight out of your return. Momentum's paper edge is real, but a meaningful slice of it is paid away the moment you actually run it.

Thirty names was the sweet spot, not ten

If momentum sorts so well, surely holding only the very strongest names should win biggest. It did not. Squeezing down to the top ten actually lowered the return, while spreading too thin across the whole broad decile diluted it. The focused but not fanatical basket of about thirty names compounded fastest, at roughly 22% a year. Momentum rewards conviction only up to a point, then punishes it, because any single high flyer can reverse hard enough to wreck a tight book.

It runs hottest when the economy is expanding

Momentum needs trends, and trends need a backdrop. Split the decade by macro state and its median month was clearly stronger when growth was rising than when it was slowing. Roaring, trending markets are momentum's natural habitat; choppy, sideways, fearful ones are where it gets whipsawed, buying names just before they roll over. It is less a stock picking edge than a way of pressing hard on whatever the market has already decided to love.

How to keep more of what momentum makes

Put it together and the strategy stops looking like free money and starts looking like a demanding craft. The edge is genuine and unusually consistent, but it arrives gross, before the tax and trading that its own churn generates. The way to actually keep it is to hold a focused thirty rather than a hair trigger ten, to accept that it will need a trending market to shine, and above all to size it so the inevitable 67% drawdown does not force you out at the worst moment. Momentum does not fail its investors. Its investors, taxed and terrified, tend to fail it.

What it held, and the worst it would have handed you

Two last checks make the risk concrete: what the basket was actually made of, by company size, and, instead of the single drawdown path, the worst fall you would have suffered no matter which month you started and held for five years.

So we took it to Krest, and ran it through the whole test.