Momentum Requires Buying What Has Already Gone Up and Selling What Has Already Gone Down

Done correctly, I believe active management can be a fruitful exercise for investors. And I am not alone as there are thousands of other industry approaches. However, virtually none of them start from the perspective of emotional discipline, as opposed to some market-based technique or skill.

In my view, active portfolio management for high-net-worth (HNW) investors starts and ends with emotional discipline. That discipline is hard won, as it goes against core human behavior. It is hard to see your money fall in value, and not take action. It is hard to make investments when they are falling dramatically. And it is hard to sit around and do nothing for days, weeks, and months on end as part of an active strategy.

However, assuming this discipline is achievable, I believe the remaining logical step is to surrender your emotions to the power of price. There is virtually no legal scenario in which a non-professional investor will secure more information about a particular investment than the sum total of professional investors, managers, or forecasters that make up the investing universe. What an HNW investor has in their toolkit is, at least for liquid investments like stocks, free and fair access to price levels. Price data contains the sum total of knowledge and opinions of all market participants, at that given time.

With emotional discipline in hand, active investors should stay on the right side of price trend and momentum. Too often, investors are told to focus on growth stocks, i.e. the next big thing, be it in technology, biotech, etc. Or they are told to buy the undervalued company, such as the beat-up industrial name that will recover. That happens a lot. But how many times are you told the following simple statement: buy things that have gone up recently, or sell things that have gone down recently?

That latter advice is momentum at its core, and it arguably works better than any other strategy over the long-term. But it is hard to implement because it contradicts human nature and emotion to buy what has already gone up and sell what has already gone down. That is why I started this post with a discussion of emotional discipline. If you have it, consider this approach. It has propelled some of the greatest professional investors of our time.

No single approach will guarantee a perfect hit rate in investments, but momentum, executed with strict discipline, gives you a shot, over the long-term, to outperform the market. After all, why bother actively investing, unless you wish to outperform the market?

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Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the author only. There can be no assurance that developments will transpire as forecasted and actual results will be different. Accuracy of data is not guaranteed but represents the author’s best judgment and can be derived from a variety of sources. The information is subject to change at any time without notice.