There isn't a day that goes by that someone doesn't ask me what I think the best strategy is for picking stocks. Are they kidding? What do I know? It's all a big crapshoot anyway. Oh sure, there are certain things to do so that you don’t throw your money all over the place but as I've said too often in this column, it is very unwise to put all your stock in one stock or all your shekels with one person, especially if it's a relative.
If you'll note (and I'm talking to the general populace here), a good financial planner rarely tells you what specific stocks to buy. Instead, you will get a portfolio of stocks within a certain industry or sector, all of which should add up to a very wise asset allocation.
However, in answer to the original question, how do you feel about momentum investing? This is a relatively new strategy for those who like to move fast and who don’t have the patience to ride out under-performing stocks.
What is a momentum investor? It is one who buys stock while the numbers are accelerating such as with share price, earnings, and revenues. Then, at the first sign of a slide, the momentum investor sells. So, the bottom line is, buy just as the stock is starting to rise and sell immediately after it begins to dip.
But there are a lot of qualifiers here. Momentum investing isn't about buying stocks that may be driven up by speculation. The stock has to have something going for it besides hype. Keep in mind that most momentum stocks have higher than average P/E ratios simply because they are expected to grow at a faster rate.
In baseball parlance, momentum investors are swinging for the fences. They don’t look at 15 percent or 20 percent returns in a year's time. Simply not worth their trouble. What they look for are stocks that will double or triple within one or two months.
My friend, Fred, in Florida, describes momentum investors as those who are seeking stocks that move at very high speeds and who operate on the theory that you can ride out a stock provided it continues to rise in price and will be successful if you bail out before the stock crashes and burns.
American academician Sheridan Titman found the strategy paid off quite handsomely for many between 1965 and 1998. And although the idea sounds simple, it really requires considerable dedication because one has to buy and sell on a regular basis. You've got to be disciplined.
Of course, bear in mind that this type of regular trading means you could lose out on dividend payments, not to mention that the trading costs will be rather high because of brokers' commissions paid every time you buy and sell shares. You could successfully argue, as some circles do, that those high costs easily erase performance advantages.
To be sure, it's a risky way to make some money and is very short-term. You might consider staying clear of this unless you have considerable experience and you are indifferent to a stock because your selling discipline must be as strong as your buying discipline--something most people simply don’t have.
But what do I know? I still have tons of tech stock shares that I refused to sell when everything tanked. That's momentum in the opposite direction.
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