with myriads of avenues available in the markets and equally potent counseling done by brokers and experts, it becomes a tad difficult to choose or follow an investment strategy. And with the current market conditions being ultra-volatile, to follow the bulls or the bears has become a dilemma for investors.
Also, the last few months saw huge money flowing into the markets, thanks to the bullish trend in the markets, but this can be misleading. And investors are at their wit?s end in finding reason for this. Harishankar Krishnan, a research head with a leading broking firm, explains, ?In the last few months, investors have been making lot of money considering the bullish trend, but a lot can be attributed to a trend in the markets and not to the stock-picking ability of investors.?
And herein comes into play the role of ?momentum investing?, an avenue of investing, which serves well when markets follow trend. It is not about following the herd, making decisions in a jiffy and end up losing money, but understanding and applying basics.
The mechanics
Momentum investing is more of a knee-jerk reaction to market information. Says Kamlesh Motwani, a passionate investor for nearly two decades, ?Momentum investing was considered to be emanated from the philosophy that more money could be made by buying high and selling higher, than by buying under-priced stocks and waiting for the market to re-evaluate them.?
And hence momentum investing seeks to take advantage of market volatility by taking short-term positions in stocks that are going up and selling them as soon as they show signs of going down, then moving the capital to a new position.
It is this: the market volatility is like musical chairs, you take a position at the stop of the music i.e. on seeing a negative trend in the stock you sell it off as soon as possible. A momentum investor takes advantage of the investor-herding by leading the pack in and then being the first one to take the money and run. Ideally, momentum investing involves technical analysis rather than fundamental. It also takes into account the price earnings to growth ratio (PE/G) and discounts the foreseeable future growth of a stock.
What?s in store for you
If you buy a growth stock that rallies from Rs10 to Rs15 get out before the correction, you?ll earn a profit of 50%. This may not be the annualised return, but the return from a position that may have been only a week or a month old. This is the speed at which an investor could potentially make a pile of money. And it is more of an opportune time
However, a momentum investor is always at a risk of timing a buy incorrectly and may end up losing money. But most momentum investors accept this risk as payment for the possibility of higher returns. In addition to this, momentum investors have to monitor market details daily. They are dealing with stocks that will go up and go down again. This means watching all the updates to see if there is any negative news. Although some investors claim to have a gut feeling about when a correction is coming, they still need to monitor all the regular information that other investors will be using. Hence the time-intensive factor plays an important role. Also, momentum investing is best preferred in a bull market; however, it also works in a bear market. Additionally, it serves well when the markets are following a trend not trading.
Adds Harish Kothari, an analyst with a broking firm, ?Though momentum investing works best in bull markets, it is the ingenuity and quick understanding of an investor that stand in good stead for him/her, irrespective of the phase the markets are going in.? And herein comes the sharp observation of an investor. Hence, as an astute investor it is an in-depth homework and cat-like agility that works for you. More so, with the markets? in the bearish mode, it is important not to get withdrawn from the markets but have faith in your observation and weigh things, which would fall in your kitty after following the herd.
Lessons
Though it seems to be an implementable avenue of investment, there are caveats, which you as an investor need to be aware of. Firstly, don?t jump into a position too soon, before a momentum move is confirmed. Also, don?t close your position too late. Also leave something on the table for the others. The reason being the tendency to follow a herd mentality is always tempting and seems to be convincing and you may over-indulge. But you need to sift and cull.
Stocks are particularly susceptible to external factors – these factors could cause radically different prices and patterns the next day. And your investment avenue must factor in this point. Lastly, you need to act quickly and take advantage of the prevailing situation in the markets.
What you should do
Momentum investing can work, but it may not be practical for all investors. As an investor, it is difficult to track markets constantly. Also, it is not necessarily for everyone, but it can often lead to impressive returns if done properly. It takes severe discipline to trade in this type of style because trades must be closed at the first sign of weakness and the funds must be immediately placed into a stock, which is exhibiting strength. And though buying high and selling higher mantra seems to be as easy as buying vegetable, does not come without its fair share of repercussions.