Momentum Investing: Why Some People Just Don’t Get It…
I’ve spent a lot of time over the past few years talking about momentum investing, and why it works.
Let’s say you’re already a convert to the cult of momentum… Have you ever tried explaining to a non-momentum investor friend why you’re buying a stock that’s hitting a new high?
I have. It always follows a similar script. One that I find funny and ironic.
The conversation typically goes something like this:
“Hey Jimmy, any new stocks you’re looking at?”
“Sure,” I reply. I’ll then proceed to give them a company name and ticker symbol. (For the record, I try to refrain from giving away any stocks that I recommend in a premium service. My followers pay good money, and I don’t take that lightly.)
They always respond with raised eyebrows as they quip, “whelp, looks like I may have missed the boat on this one.”
A quick detour… Another funny remark I get is when I mention a stock with a high nominal price. I almost always hear a response of “oh, that’s expensive.” Of course, they aren’t referring to the stock’s P/E or any valuation metric but to the actual cost of the stock. I guess people feel better about buying 200 shares of a $10 stock than 1 share of a $2,000 stock.
But I digress…
Only in the financial markets do people see a stock hitting a new high and shy away. Probably because “buy low, sell high” is so ingrained into our psyche that anything already high is seen as no good, or a bad investment.
Yet, in nearly every other part of our lives, we do the exact opposite…
Why Momentum Is A Good Thing
People aren’t moving to South Dakota in droves even though housing and living are cheap. No, they are heading to places on the rise (hitting new highs, if you will) like Austin, Texas, where the housing — and cost of living — is nowhere near cheap.
As the holidays approach and we’re out shopping for gifts, we probably won’t settle for an old Walkman cassette player because it’s currently “on sale.” Chances are we will go with the latest gadget or brand that has taken the market by storm. Take the Apple iPhone, for example. For years now, consumers have resolved to stand in line for hours (or be the first to order online) just to purchase the latest edition.
This growth — or momentum, as it were — in the iPhone’s popularity has led to record sales practically every year since its initial release.
But here’s the ironic part. If you take this same concept and bring it into the investing world, many on Wall Street — and friends and family who aren’t familiar with momentum investing — will simply scoff at you. This idea of buying the best-performing stock is regarded as “thoughtless” or “idiotic.” Apparently, only on Wall Street is this type of thinking deemed foolish.
But my Maximum Profit subscribers and I know better.
One of the main drivers for this disdain regarding momentum investing is that it’s tough to explain, and hard to quantify. It’s not something you can simply spot on a company’s balance sheet or income statement, nor will you hear management talk about their stock’s momentum on a conference call. Even Eugene Fama, “The Father of Finance” and a Nobel laureate, refers to momentum as an “anomaly” to his Efficient Market Hypothesis.
If something is tough to explain or prove, plenty of critics are ready to shower you with skepticism. The Greek philosopher Aristotle was one of the first to argue that the Earth was spherical — a claim that was challenged for many centuries thereafter.
Investing This Way Has Saved Me Money And Headache
I don’t know much, but one thing I do know is that momentum investing, and following the Maximum Profit system’s strict rules, has saved me a lot of money this year.
Back in September, in an interview with my colleague Brad Briggs, I shared a statistic from Vanda Research showing that individual investors were sitting on an average paper loss of 27% this year.
But according to JPMorgan Chase (NYSE: JPM), personal portfolios in the U.S. fell a gut-wrenching 44% between early January and October 18, as you can see below (from this Financial Times article):
Maybe buying stocks that are hitting new highs is silly for some people. But holding onto massive losers dragging your overall portfolio down seems even sillier.
Sure, we’ve had our challenges in this market. But most of our losses are small, thanks to our sell signals and our willingness to cut bait and move on. But there have been some bright spots, like 19.8% from Canadian Natural Resources (CNQ) in less than five months, 20% from Teck Resources (TECK) in three months, and 40% from Perficient (PRFT) in six months. That’s a hell of a lot better than being down 44%.
Look, it might not make sense to some people, but buying high and selling higher while keeping our losses small works. And perhaps I’m preaching to the choir here, but I know how devastating it is to hold onto even one big loser. I’ve done it. It sucks, and it tears at you every time you open up your portfolio.
But I sleep pretty well at night knowing that this style of investing has kept me mostly in cash this year and that I have strict sell signals in place for when things turn south.
The hardest part is just staying disciplined enough to do it.
Editor’s Note: On November 1st, my colleague John Persinos is holding a special investment Town Hall, called “The Marijuana Millionaire Countdown.”
As the U.S. midterm elections loom on the calendar, he’ll explain the little-known reason why federal legalization of marijuana could be days away…and why a slew of states are on the cusp of creating new state-legal markets.
New state-legal markets equal new growth for well-positioned marijuana companies. The time to invest in marijuana stocks is now, before political catalysts propel them higher.
During this special online Town Hall, John will reveal the one simple marijuana trade that could dump piles of cash into your brokerage account, before the midterm votes are even counted. Click here to grab your free spot!