Why should a company fundamentals-driven investor have a problem with momentum investing?
–momentum investing is a reactive strategy, and
–one that focuses on the past price movement of the little pieces of paper (or electronic impulses) that trade in the secondary market.
In contrast, fundamental investing is a predictive strategy based on the idea that the price of the paper/bits will ultimately be determined by the value of the underlying company. Among fundamental investors, value investors believe that the key is the worth of the company as presently constituted (but perhaps running more smoothly than it in fact is). Growth investors think the key is in early recognition of novel and unexpected profit positives that will fully emerge only in the future.
What kind of a thing, reactive or predictive, is my formula for TSLA of: buy at $180 and sell at $250? In a sense, I’ve got some fundamental underpinning. My back-of-the-envelope figuring suggests nothing is likely to happen inside the company Tesla over the next couple of years that could possibly justify more than a $250 price. And I’m willing to sell at that price even though the stock is still exhibiting positive price momentum.
But how did I get the $180?
What I’ve really done is to take a chart of the stock and draw a line that runs through the lows of the past four years or so and to conclude that this line forms the bottom of a channel (with something like $250 as the top) that TSLA has been navigating itself through since late 2013. Yes, at $180 I have better potential for upside than I do at $250. But that’s more a fact about arithmetic than a deep insight into corporate operations at Tesla.
In sum, then, the fundamental underpinning of at least the buying are pretty lame.
So I guess I have to say that there’s a healthier dose of momentum in my fooling around with TSLA than I might like to admit. On another non-fundamental note, though, this ensures that my California son and I stay in regular contact.
Thanks for the writeup.
I get very focused on price and momentum as well, but it is also very enjoyable to learn a new company and a new industry. I like electric cars, don’t think Tesla is going to work that well, but it is interesting that the car industry is now so supply chain disintermediated (or maybe mediated) that a company can assemble a car like a Shenzen phone.
Reminds of Joesph Paxon, mostly remember no as the guy who built the Crystal Palace, but was a gardener. He figured out enough of the future to make himself a very wealthy man.