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Commentary

Momentum Investing – Sin or Strategy

Ambhimanyu, the son of Arjuna had knowledge of entering the Chakravyuha but not the knowledge of coming out. This ended up with him getting killed and while the story being one of good and bad tries to magnify how the bad came together to kill him, the point that is missed is that he knew when we went in that he did not know the way out.

Investors in markets are in many a way Ambhimanyu’s . They know how to enter and hope that somehow they can exit before getting killed. But then again, the bad guys (Brokers, Operators, FII’s) all gang up and kill the poor little investor and snatch his monies.

Momentum Investing has its non-believers but I was kind of astonished to see that in a Document brought out by the Library of Congress whose ideas seem to be subscribed by the SEC (US Equivalent of India’s SEBI), one of the 9 sins they lay out which derail investors is “Momentum Investing”

The biggest misconception in my opinion about investing is that the style is seen to be dictated by the price move rather than knowledge of the style. Just like buying a stock that is falling doesn’t make one a Value Investor and Buying a stock that is going up doesn’t make one a Momentum Investor though it may seem to be very close to the idea.

The key to success in Momentum Investing is not about Entry but about Exits. A Momentum Investor exits a stock that stops seeing positive momentum – whether this is temporary or permanent is time will tell.

A common misconception is that Momentum Investing is about buying stocks regardless of whether they are fundamentally strong or not. But the irony is that rather than we being the deciders on whether a company is good or not, we allow the other participants through their actions dictate whether a stock A is good or not. What could be more democratic an idea than that?

I am a momentum investor and yet there are quite a few stocks that are having the strongest momentum yet not part of my portfolio. Momentum Investing doesn’t need to be about just blindly buying stocks that have gone up the most.

Look at the table below – these are stocks that have the best “Momentum Score” if you used a long term look back. If your portfolio has such stocks, are you a Value / Growth Investor or a Momentum Investor?

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