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Value Investing v. Momentum Investing October 29, 2009

Posted by shaferfinancial in Finance.
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So you want to be an investor.  You better make some decisions up front.  One of those is choosing a style of investing.  Of course most people just start throwing money around and never think about this, but you should.  The two main styles are value and momentum.  Value investing, popularized by Benjamin Graham and his disciple Warren Buffett, looks for investments that have a history of consistent performance that can be bought for a fair price.  The thinking is that as long as the performance remains  consistent you can come to a fair price to be paid and wait until the investment can be bought for that fair price or even lower.  Negative emotions are your friend as negative market emotions drive down the prices of even good performers.

Momentum investors could care less about price or performance.  They rely on correctly noting the direction the price of an investment is going early into its trajectory.  Both positive and negative emotions are relied upon as momentum investors like the ability to sell short if the trajectory is down.  The key is hopping on the trajectory early and getting off soon after the trajectory changes.

Note, both these strategies require market timing, one by changes in momentum, the other by good pricing.   Now momentum strategies are very high-tech these days with folks  writing their own computer code to give the buy and sell signals to take their emotions out of the equation.  And proponents of both strategies have publicly disclosed returns and wealth that are impressive.

Now hear this, there are many folks that say that “market timing” doesn’t work, but the fact remains that is the only thing that works to create wealth.

For me, I decided over a decade ago that I was going to be a value investor.  2008 was a very good teacher for me.  I did not have a huge amount of $$$$ saved up to take advantage of the values that appeared like I should have.  That won’t happen again.  Fortunately for me, Warren Buffett did.  Early on I decided I would put much of my money into his hands to invest for me while I learned.  I often suggest other folks do the same.

Many times I find folks are reticent to put their money in Buffett’s hands, instead trusting in some indexing/mutual fund/asset allocating strategy dreamed up by some engineer/accounting/financial adviser/numbers guy who purports to have found the best risk adjusted way to invest.   To each their own, but until I find one of those guys publicly noted rate of return that rivals Buffett,  I will continue to do what I do.

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