Momentum Investing

Posted on 27 August 2013 by Douglas Chadwick

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 its impetus and so it is with investing. The greater the money that is being invested into a fund or asset sector the quicker its value will rise and it will acquire greater impetus as it attracts other investors. Obviously the opposite applies, as a fund or sector loses investors the upward momentum ceases and it will reverse, gaining impetus in the opposite direction. It is of course possible to make financial gains as the value of the market falls by selling short using Exchange traded funds. This requires a lot of attention as ETFs can move quickly and in a volatile market it is easy to make costly mistakes. At Saltydog our Tugboat portfolio is intended to be a safe and secure investment so we do not use ETFs. These are some of our thoughts at Saltydog on Momentum Investing. The basic idea is that once a trend is established for a fund or asset class it is more likely to continue in that direction than to move against the trend. We believe that large increases in value will be followed by additional gains and vice versa for declining values. The Value investor will try to buy low and is anticipating being able to sell high, whilst the Momentum trader will buy high and sell higher whilst riding the herd. He just has to avoid falling off and getting trampled. The strategy works best in a Bull market and is least comfortable when the markets are undecided and volatile. This is the time to head for harbour and cash. If you are permanently invested in the market at all times you will need perfect foresight to protect your investments and that would be unnatural. In our book the ability and willingness to run away beats the macho strategy of always holding on. Whilst doubt is not a pleasant condition, certainty is just absurd. A Momentum Investor needs access to constant up to date fund and sector information. Ideally this will be presented in such a way as to high light what is flavour of the moment and will have removed the dross. Knowing what was performing one, three and five years ago just does not cut the mustard- in fact it is pointless. With current performance numbers you are able to see whether the markets are confirming your beliefs which you will have got from your financial reading and other sources. At Saltydog we believe that this is the right way round to make your investments. It is sacrosanct that the numbers must confirm our beliefs before committing our money.