Momentum Investing: How Do You Define It?

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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

LONG-TERM GAIN
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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MariaRinehart: Love the lessons from old IBD contributors -- Classic
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Visitor - Ken Shreve: I tend to favor cash and will look for occassional short opportunities when they present themselves. As I wrote above, my ultimate goal is to buy stock and hold it for a long-term gain but every stock is different. For example, I might buy a stock and three months later it's up 20%. If I start to see signs of insitutional selling in the stock, I won't be afraid to lock in a quick profit. But if I buy a stock and it shows a bigger percentage gain after six months, I will give it more room, even if the broad market is starting to pull back. In other words, I'm OK letting a 40% gain turn into a 25% to as long as it's an orderly pullback.
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KiraBrecht: Great story Ken! But, what do you do during bear markets? For example during the 2000-2002 and 2008-2009 bear market, how does a momentum investor for the long term play the market? Do you short? Raise cash and sit on sidelines?
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About the Author

Ken Shreve got his start in the financial markets with Investor’s Business Daily (IBD). He spent over 10 years as an editor and columnist for IBD and its Web site Investors.com.  He also acted as the Investors.com "Market Wrap" anchor and presented IBD investing workshops and seminars nationwide. Shreve continues to provide market commentary on national radio and has appeared on CNBC.

He now writes Ultimate Growth Stocks, a weekly newsletter at TFNN and hosts Breakout Investing, Monday through Friday from 3-4 PT. Learn more at www.kenshreve.com.

Ken has also contributed to TheStreet, Realmoney.com and Realmoneypro.com and has been a regular contributor to Jim Cramer’s “Off the Charts” segment on Mad Money.

For more information about his growth stock newsletter and model portfolio, e-mail him at ken.shreve@yahoo.com

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