what it is
Momentum investing is a style, if one can call it that, of buying and selling securities based simply/solely on recent price momentum. If a given stock is going up, buy some. If it continues to rise, buy more. If a stock begins to decline, sell it …or, for very aggressive players, sell it short. No fundamental data counts.
Day traders and very short-term-oriented algorithmic players are the main people who use this simple buy-if-they’re-going -up, sell-if-they’re-going-down rule. In my career, I’m only aware of two “professional” investment groups who have practiced momentum investing as their main strategy: Wood Mackenzie trading oil stocks in the early 1980s, Janus trading tech stocks in the late 1990s. The former was an almost immediate disaster; the latter had a surprisingly long period of success before going down in spectacular flames.
The term has come into recent vogue in the financial press as a description of growth investing.
It isn’t one, although it may reflect the jaundiced view a few (narrow-minded, in my view) value investors have of their growth colleagues.
To be clear, growth investors try to make money by finding companies that are expanding faster than the consensus expects. This is not momentum investing. Nor is the style of value investing that requires that a company not only be bargain-basement cheap but that there be a catalyst (reflected in positive price momentum) for change before buying.
why write about this?
A few days ago, a regular reader, Small Ivy, characterized my speculative dabbling in Tesla as momentum investing. Maybe so, maybe not. More tomorrow.