It’s the Best Strategy No Serious Investor Ever Uses…

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It’s another boring week for the stock market…

The major averages are standing still.

But here’s the thing: Momentum stocks are soaring.

“The MSCI U.S. Momentum Index, which tracks companies with the most price appreciation in the last two to 12 months, rallied 11 straight days through Friday,” Bloomberg notes, “the longest stretch since October 1992.”

Bloomberg claims there’s a “desire to chase winners after the strategy failed in 2016”.

Chasing winners. 

I hate that.

Likening momentum to chasing winning stocks makes the strategy sound so foolish. Only losers and simpletons chase stocks.

You hear this kind of talk all the time from all sorts of Very Serious Investors.

They’ll peer over their glasses and tell you that you can’t beat the market by chasing momentum.

The problem is most investors agree with this statement. After all, some guy in a suit and tie said it on TV. It must be true!

It’s not.

Momentum is the best performing strategy you can employ—yet barely anyone does it.

Most investors are too wrapped up in debating growth vs. value. Yet when it comes to performance, both growth and value trail momentum.

There’s data to back up that statement, too.

“Empirical data shows that momentum has indeed been a consistent long-term investment strategy,” John Hancock’s Frank Teixeira writes. “In fact, momentum factor returns have been stronger than those of either growth or value over the very long term, resulting in significant excess relative performance. Momentum averaged more than 3% in annual outperformance relative to the market from 1927 to 2014.”

Just look at all those growth and value funds.

Why is everyone pouring their hard-earned investing dollars into inferior strategies?

It’s because of their narrative filter.

It’s shockingly simple to force a growth or value strategy into your personal narrative.

Growth is the easiest sell. It’s all about stories. The next Facebook. The next Apple. Who doesn’t want to own these ideas? And value appeals to our more rational emotions. I want to make money safely using a rigorous, academic approach. Again, how could you say no to that? The stocks that eventually outperform are the hidden, undervalued, unloved gems. It makes perfect sense.

But momentum? Buying the strongest stocks on the market and then just repeating this process over and over? C’mon. That sounds ridiculous. The whole idea of momentum investing is too simple. And nothing simple could possibly work in the cutthroat world of the stock market.

False!

While momentum sounds simple enough, it’s not an easy strategy for most investors to employ. If you’re running any type of momentum strategy and rotating into the strongest stocks on the market at any given time, you’re buying a bunch of stocks most investors wouldn’t touch because at a glance, they look overextended.

Take a minute and think about the big momentum winners we’ve seen over the past 12 months. Facebook. Netflix. NVIDIA. Would you have forced yourself to buy these names as they surged higher?

Hindsight shows us that they all offered stellar returns after their strong initial moves. But in the moment, most investors would have skipped over these stocks or attempted to wait for a pullback that never materialized.

That’s why momentum ain’t as easy as it looks. But it works. If you can get out of your own way, you stand a fighting chance at grabbing the next round of massive momentum winners… while other investors are stuck chasing their tails.

Sincerely,

Greg Guenthner
for The Daily Reckoning

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