Momentum investing has been a dirty word on Wall Street for as far back as I can remember.
It's scoffed at as a reckless and dangerous style of investing. The perception is that momentum investors focus on charts alone, looking for stocks that are going up the fastest. Sky-high valuations don't matter. Scalp for a couple of points and move on to the next one.
That's one group of momentum investors, but believe it or not, there's another group of momentum investors where fundamentals carry just as much weight as relative price strength. Price momentum matters, but momentum in other areas carries just as much weight - momentum when it comes to annual earnings growth, quarterly earnings and sales growth, return on equity and institutional sponsorship, among other things.
I'm a momentum investor that focuses on fundamentals and technicals. I don't mind high-multiple stocks but only if there's growth story supporting the high valuation. Strong fundamentals, technicals and seemingly high P-E ratios have all been common traits of past big market winners before huge price moves.
Can momentum investors be long-term investors? You bet they can
My goal is to always buy a stock and hold it for a long-term gain. I like to buy when a stock is breaking out of a consolidation area in the early stages of a new market uptrend. Well-timed buys -- when new institutional money is coming in from the sidelines -- make it much easier to be a momentum investor and a long-term investor at the same time.
TIMING IS KEY
The goal is to buy at the right time, sit tight through normal pullbacks and hold on for a nice gain. It hasn't been easy in recent months due to persistent market volatility, but it's always the goal. The goal is NOT to trade in and out of positions, hitting singles all the time. The goal is home runs, and the early stages of a market uptrend can deliver them.
KEEP AN OPEN MIND
So what's the bottom line? Next time you hear the term momentum investing; don't be so quick to dismiss it. Some of the smartest investors I know are momentum investors with a consistent track record of outperformance, but it's a combination of fundamental and technical analysis that fuels their performance, not technical analysis alone.
[Editor's note: What's your style of trading? Post a comment and let us know below.]
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