VR Logo

Momentum-driven Investing

Investors would do best by keeping a cool head because the momentum of the markets could change suddenly…

Late last year, researchers at the London School of Economics published a study that tried to validate momentum investing. The study did a 100-year simulation of an investment strategy that tested the simple idea that stocks that are rising keep on rising and vice versa. At the time, I wrote that the strategy they tested was an automated, algorithm-driven sort of momentum investing that bore little resemblance to the pick-and-choose trading that your everyday punter calls momentum investing.

Eight months later, as the world’s investment markets hurtle downwards, seemingly in the grip of a most disconcerting sort of momentum, it’s interesting to think of this as a force that is growing more and more powerful. All around us, we have any amount of evidence that we are in for a long slide downwards. However, on any given day, fear is more powerful than logic and the power of negative emotions to amplify themselves is immense. The logic might say that stocks are fairly, or even attractively priced now, but then we are not in a logical situation. Who says that if stocks can go much above a fair price, then they can’t go a lot below the fair price also? Clearly, it’ll be a while before the current downward momentum spends itself.

However, the point is precisely the opposite. All things pass, and so shall this. The best thing an investor can do is to be aware of what’s real and what’s mere momentum. That’s actually, a sort of a self-awareness because the difference is largely in your mind. This momentum could go a long way before it reverses itself. Moreover, it’ll do so suddenly, when least expected. For those who keep a cool head on their shoulders, this is an extraordinarily advantageous time to invest.