DIY Investor Magazine
/
2015 Issue
27
stay the course and do not fall by the wayside. There
is also another reason why this style is popular with
some managers and that is because when a company
is small it is usually less well researched. This means
that price anomalies may exist and there is a bargain
to be bought by the fund manager or person that does
this research. So at the end of the day, it turns out that
this is really just another form of value investing that
is restricted to small companies as opposed to large.
As policymakers aggressively cut short-term rates,
sometimes into negative territory, the new environment
pushed some real estate markets upwards, reaching
bubble conditions. Whether QE was the cure or another
disease is yet to be seen, but undoubtedly it created
financial extremes.
MOMENTUM INVESTING
Momentum investing via funds has much more logic
to its approach and in my book makes far more sense.
By using funds, you spread your risk away from
individual companies and you also avail yourself of
the knowledge of the various fund managers and their
research teams. A scientific definition of momentum
might be ‘The force possessed by matter that is in
motion’.
The product of the mass and velocity of a body gives
it impetus and so it is with investing. The greater the
money that is being invested into a sector the quicker
its value will rise and it will acquire greater and greater
impetus as it attracts more and more investors. For a
time its rise will become self-fulfilling. Obviously the
opposite also applies. The idea is that once a trend is
established either upwards or downwards for a fund
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or sector, then it is more likely to continue in that
direction than to move against the trend. Put simply,
momentum investing can be likened to a relay race.
When a sector is doing well, then you choose a
performing fund from that sector to carry the baton,
and when that sector runs out of puff, then you hand
it on to the next fund, in the next sector that is pulling
ahead and gaining momentum.
You are in fact making use of the knowledge of the
fund managers and their analysts when they are
right and moving on to another team of winners as
your current ones start to falter. You all know from
your childhood that it is better to be on the ladder
and off the snake. The trick is to see the trends and
to move your money into those funds on the up and
out of those on the down – without over-trading or
fussing too much about getting the top or the bottom
of the movement. The advent of fund supermarket
platforms not only allow you to track down the best
performing funds and sectors in order to make your
trading decisions; but also they allow you to make
your trades at virtually no cost. It really can be a win-
win situation provided you have access to and are
using current, accurate information.
In summary; value investors will try to buy low and
anticipate selling high. The momentum investor will
buy high and sell higher whilst ‘riding the herd’.
Personally I would rather be buying something that
is working today rather than hope that it will work
tomorrow. I am certain that if you are able to work
out the charges on your telephone bill, then you can
succeed as a momentum investor.
