between the two stories? A full reconciliation of these two bodies of evidence is beyond the scope of this article, but we suggest that they may not be incompatible. The common element is the markets tendency to anchor too heavily on past trends. Investors discount new information that is at odds with their mindsets and change their perceptions gradually.

Stocks selected under a momentum strategy, however, carry along a very different set of investor perceptions from stocks selected under a contrarian strategy. Our price momentum strategy identifies low-momentum stocks, for example, on the basis of poor returns over the immediate past (the prior six months). On looking at their experience over a more extended past period, however, these stocks are on average not much different from other stocks, so investors extrapolate from the past and perceive them as normal stocks. For example, the compound rate of return beginning three years and ending six months before portfolio formation is about 61 percent for the portfolio with the lowest past six-month price momentum, compared to the average of 62 percent over all stocks. Given this mindset, when disappointing news arrives, investors initially discount the information. This gives rise to a subsequent downward drift in prices.

In contrast, a contrarian strategy focuses on stocks that have extremely poor returns over a prolonged past period. The history of disappointments creates an investor mindset of excessive pessimism. This may be reinforced by money managers unwillingness to be regarded as holding an imprudent investment that might fall into distress. These companies, however, are not as poor investment prospects as the market perceives them to be. Rather, it takes time for these stocks to shake off the unfavorable opinions that investors have accumulated. LaPorta, Lakonishok, Shleifer, and Vishny (1995) study such stocks and find that the markets learning about future earnings prospects is a long and very drawn-out process, lasting for a few years. This sets the stage for subsequent reversals in prices that may persist for several years. As in the case of low-momentum stocks, the reversals are a result of investors tendency to over-weight the past and extrapolate too far into the future. This line of thinking is, admittedly, only suggestive. Spelling out the links between momentum strategies and contrarian strategies remains an important open area of research.

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