Monthly Archives: March 2017

momentum investing (ii)

March 3, 2017 By in Uncategorized 1 Comment

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?

 

 

 

a clarification on Keeping Score

March 2, 2017 By in Keeping Score, Uncategorized Tags: Leave a comment

I didn’t proofread my Keeping Score entry too well yesterday.  I wrote the entry the day before, re-read it quickly yesterday morning and pushed the Publish button.

Anyway, the post contained a section on economic growth that refers to “Washing,” which should have been “Washington.”  My point, if there was one, wasn’t that clear, either.

It’s that maybe Washington has always been the swamp we perceive it as being today, but that it just didn’t bother the country as much way back when.  How could that be so?

Let’s say that a smoothly functioning government can add 1% to real GDP growth per year and a bad one can subtract 1% (I’m just making these numbers up–showing why I probably shouldn’t have written about this at all).

During the “golden age” of US growth in the 1950-1980 period that some look so fondly back to, real GDP averaged about 4% per year and inflation about 5%.  So nominal GDP grew at about 9% annually.

Compare that situation with today.  Real GDP is averaging about 2% and inflation about 2%, as well.  That makes a total of 4%.  (The reasons:  aging population + the countries whose industrial structure was destroyed during WWII rebuilt.  So we stopped being the only game in town and had real competitors again.)

If we restore the 1% I’ve hypothesized (daydreamed) that Washington subtracts through corruption and maladroitness, real GDP would have been 11% higher in the old days but 25% higher today.  Put another way, when we were growing at 10%, a 1% subtraction gets lost in the shuffle;  when we don’t have many percentage points to lose, that 1% becomes much more important.