Momentum investing is buying securities as/because they’re going up, and selling them as/because they’re going down. It’s a simple form of technical activity. As such, ultimately it’s based on the idea that the “insiders”/”smart money” are driving the stock, using highly accurate knowledge that we don’t have. So we’re just along for the ride.
On the surface, momentum investing has some similarity to both value and growth stock investing.
–Growth investors project future company earnings advances. We hope to find firms that are undervalued at today’s price because the consensus underestimates the speed at which profits are expanding and/or the length of time extra-fast growth will continue.
Yes, there’s momentum, but it’s the momentum of corporate earnings. We’re not along for the ride; we believe we’re leading the charge. We find out whether we’re correct or not as the firm in question reports quarterly results and comments about future prospects.
–Value investors, generally speaking, make one of two calculations. They figure that today’s value of a company’s assets (minus what it owes others) is substantially–meaning 2x or 3x or more–higher than today’s market price. Or they figure that this would be the case if the firm in question had better management. They buy in advance of either market recognition of the true asset value or a change in company management that can lead to a quantum leap in value.
Some value investors simply buy. They argue that the first people to notice the valuation disparity get in at the lowest price. Others worry that doing so can result in having dead money for an extended period of time. This second group wants to see a catalyst before acquiring shares. This catalyst is many times positive price momentum. Unlike a pure momentum player, however, the value investor believes he has the superior information. The positive price movement is merely a signal that others are catching up with company developments and coming to the same conclusion he has already made. So throughout the process he thinks he’s the smart money, not other buyers. He may even have tried to heop the process of discovery along by informed others of his research after he’s established his position.
Tesla and me on Monday.
P.S. No one seems worried that SNAP shares are non-voting, are they?
The Snap IPO is likely the bell ringing (at or close to the top). There is an interesting article in last week’s Economist regarding valuations ….. it didn’t come out with a strong view, but most data suggest we are (and have been for a while) at the top. Interestingly, the Fed has increased M0 significantly since the beginning of the year – this may explain part of the recent froth.