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Momentum investing and value investing are two competing strategies about the stock market. One tells you to avoid buying during a downtrend and go all in when stocks are going up. The other tells you to do the exact opposite.
So, which one of these two theories is better? Well let’s look at their advantages and disadvantages.
The advantages of momentum investing are
1. Faster Profits
If you are value investing it could take months or even years before you know that you are right. On the other hand momentum investing creates very fast profits. I have personally bought an up trending stock and seen a nice return in a matter of days.
Value investing can give you quick profits as well, but they are less common and typically it takes a long time to see the fruit of your labor.
2. Get the Majority of the Move
Bottom pickers tend to get out of a stock way to early and that cost them money. A bottom picker may buy a stock at $20 and sell it when it reaches $50 only to miss out as the stock finally tops out at $100.
Momentum investors do not have to worry about this because they are in the stock as long as the trade is going their way. This strategy makes sense after all people are greedy and will buy something simply because it is going up, regardless of whether they even know anything about the company.
3. Bear Markets
Bear markets happen, when they do, stocks fall, it is that easy. You can either be the person saying everything will be all right in the long term or you can be the person making money by being short the market.
In a bears market nothing beats momentum investing.
Value investing does have some advantages over momentum investing however they are.
1. Smaller Risk
A bottom picker has a smaller risk because they buy stocks at a deflated price not an overinflated price. But this is assuming that the trend trader is not going to cut their losses by using things as stop orders.
2. Less Management
This is the biggest benefit of value investing. You simply buy a few stocks and let them sit for a while. You do not have to actively manage your account, or pay any attention to it. The only reason you would have sell is if something changes, such as the company has taken on more debt, or it is overpriced.
So which strategy is better? While I have done both I believe momentum investing is much more powerful. But in order to make it work you really need to learn stock trading basics such as cutting losses short and letting your winners ride.
If you are unable or unwilling to learn then investing in strong companies for the long term is not a bad alternative. It has been proven to be successful if you hold stocks long enough.
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