Strong Momentum -> Strong Performance
I will never forget the first time I sat down with a growth-oriented portfolio manager. I was working for Bloomberg, and my job was to help financial professionals see how they could use our product to improve their investment returns.
As an aspiring technical analyst, I was excited to show them some of the charting tools I was using, many of which had been huge hits at the hedge funds I’d been working with.
I very quickly discovered that my “mean-reversion-buy-low-sell-high” approach was exactly the opposite of what this guy was looking for. He brought up the new 52-week highs list, and was actually considering buying those stocks. What?!?
“Perhaps the best-known investment paradigm is buy low, sell high. I believe that more money can be made by buying high and selling at even higher prices… I try to buy stocks that have already had good price moves, that are already making new highs, and that have positive relative strength.”
As my career progressed, and I ended up working closely with growth investors in Boston, I began to appreciate the benefits of the long game. I observed that the short-term tactical swings that resonated with traders would form into longer-term trends that spoke to investors. And I realized that there were a number of different ways to make money in the financial markets!
In my recent podcast interview with author and money manager Gary Antonacci, he basically provided a mini-masterclass in momentum-based investment strategies. We talked about why markets trend, and not surprisingly it comes down to the traders and investors whose emotion-driven decisions drive stock prices.
As Gary wrote in his fantastic book, Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk, “Under the tenets of behavioral finance, markets are not always efficient. It is human behavior that moves markets and not the universal information shared by market participants.”
Mindless investors ignore the trend, fight the tape, and usually end up with some painful scars to show for it.
Mindful investors know that strong momentum leads to strong performance, so they focus their time on identifying trends and following them.
RR#6,
Dave
PS- Need help identifying trends and following them in your own portfolio? Our Market Misbehavior premium membership could help you upgrade your process and upgrade your performance! Use code MMWEEKLY for 30% off the first 12 months on any plan.
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.
The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.
