what is momentum investing?
“perhaps the best known investment paradigm is buy low, sell high. i believe that more money can be made buying high and selling at even higher prices.”, said Richard H Driehaus, chief investment officer and founder, Driehaus Capital Management.
“buying high and selling even higher” may sound strange at first but this contrarian approach to investing serves as the basis for momentum investing.
the quote by Driehaus, who is credited as the father of momentum investing, simply means that if there is a strong trend in the price movement of a stock, whether upward or downward, it is likely to continue in the short term.
in plain speak, a momentum strategy will look at buying stocks that are showing an upward price ‘momentum’ and shorting the ones which are showing a downward price ‘momentum’. momentum investors position their trades on the belief such trends are likely to continue.
as a strategy, it does appear to be starkly different from value investing. there the idea is to identify and invest in undervalued stocks which have the potential to grow as the broader market realizes their true worth. hence, in value investing you want to buy a stock when it’s cheap and hold it for a long-term. you are also required to assess various factors like sustainability of the business, competitive advantage, consistent profitability, management, etc.
momentum is more systems driven and focuses solely on the price movement of stocks.
hence, unlike in value investing where it is advised to buy and stay put for a long term, momentum investors are required to reassess their holdings at regular intervals.
this relatively short term approach leads to a lot of churn in one’s portfolio and associated costs in terms of fee and taxes. this can impact the final returns.
also, there is the risk involved of missing out on a trend. if you are too late to buy an upward momentum stock then your returns will be subpar. then if you don’t sell on time, you risk being caught in the downward momentum as well.
in India, momentum investing is still not that popular and DIY investing with this strategy is difficult for many to grasp. but there does exist a passive way to diversify your portfolio with this strategy.
the Nifty 200 Momentum 30 index, which tracks the performance of the 30 high momentum stocks within the Nifty200 index universe, can help one to take exposure to momentum in a safer manner.
in fact, over the long term the Nifty momentum index has outperformed the benchmark Nifty 50 index. since 2010, the momentum index has generated an annual return of 20.3% against 11.4% by the Nifty.
are you ready to take a ‘swing’ at it?