Hey there!
I’m sure until now you must have started investing in the market in one form or the other.
Either in the equity or debt market!
And I’m sure you have chosen the finest stocks best suited according to your risk profile in your portfolio.
If any of the above parameters change it is evident that your portfolio will not look the same.
There are innumerable ways to invest in the market.
Out of this the two well-known and the most successful approaches are value investing and momentum investing.
Often investors pick one of the two strategies but fail to understand the type because of the technical ‘Jargon’!
To explain both the strategies, let us simply start by understanding their underlying moto.
Investing through Value is simply ‘buy low, sell high.’
But nowadays while the markets seem to be forever trending the moto needs a slight tweak which goes as ‘buy high, sell higher.
Value investors are known to fall in the category of people who are brave and smart enough to ‘catch a falling knife’.
Meaning, when the market trembles, some stocks in spite of having a steep fall are fundamentally strong and can be considered as stocks that prove to be a silver lining!
Investors analyse stocks fundamentally knowing their business top-to-bottom first.
Such stocks which fall in the category of having strong intrinsic value can be handpicked by calculating the organization’s assets, profits and growth rates.
When the market trembles the is a good opportunity to bargain for the stocks with such good intrinsic values.
Therefore, it’s shopping time for an investor!
What do you think, how did the most successful investors, like Warren Buffett himself build such a massive fortune?
The answer is simple!
By following such investing strategies and shopping continuously when the market is down!
Discipline is the key to integrity; every investor should follow.
Note that the value of the stock is not known overnight, it takes several years to understand the value of the stock.
Just like a rough sea makes a perfect sailor, the stock value come out as an outcome of its ability to stick to its fundaments in the most dread trembling markets!
And this is how an investor gauges a stock with the help of its historic performance.
And hence, they call it the market’s weighing machine which assists to bring out the true colours (value) of a stock.
If an Investor sticks with a fundamentally strong stock, he will be rewarded for his patience and discipline.
That’s because as time passes the value of the stock increases.
Increases are not always in a linear pattern but sometimes in exponential ways!
A recent study states,
Investing in something and completely forgetting about it for an extended timeline (as you said 10 years) works!
This ‘forgetting’ plays a major role!
Why?
Because…
– if we stay invested in the indices for 1 hour there is a probability of growing your portfolio by 50%
– if we stay invested in the indices for 1 year there is a probability of growing your portfolio by 68%
– But if we stay invested for more than 7 years you have never lost money!
Aren’t the numbers impressive!
Let’s understand momentum investing.
Momentum Investing credo is ‘buy high, sell higher.’
Don’t get confused when I earlier said the twerking thing about ‘Value Investing’!
In fact, Momentum Investing is the new Value Investing!
By the end of this blog article, you will have a clear understanding of why and how!
Momentum by the name throws light on price trends, whereas, Value investing completely focuses on the fundamentals such as growth parameters.
What’s in the mind of a Momentum Investor?
How do they understand the market and stocks?
Momentum investors pick stocks that have recently performed well irrespective of the market conditions and they believe that such stocks will continue to outperform in the near future given their past record has already proved it.
They take support of technical analysis, refer chats, look for patterns and formations signals focus on the quantitative indicators to look for an upcoming trend change in market trend.
And not to forget they emphasize market sentiments as well.
Momentum Investing is usually investing short-term, usually, it ranges between months, but less than a year.
Note that value Investing and momentum Investing are completely different approaches.
Both cannot be sub-set of each other, but there is a possibility that value investing can take the form of momentum investing given the market conditions.
And there is no doubt in saying that the current market is the best example, and is liable to take all the credits!
While Investing, an investor has to opt for one of the two and cannot apply both on the same portfolio.
This is because, while investing there is a different mindset and market volatility must be considered.
Value investors stay put with their portfolio for a longer term, they seem to be unaffected by the volatile and market sentiments.
On the other hand, Momentum investors are speculators who lack knowledge and often opt to trade.
Value Investor builds fortune and wealth.
Momentum Investors build capital for Investing.
The magic of compounding is reflected in the Value Investing type of portfolio.
The fuss between Momentum investors and Value Investors is that they view each other as old-fashioned monks in the market, especially when there is a market crash.
Both types of strategies excel in their own ways and investors are benefitted during different cycles of investing.
Note that Value and momentum are directly proportional, even if Value Investing is categorized as old-fashioned in the coming years it is anticipated that there will be a good relative performance considering the ever-growing inflation and the interest rates.
What type of investor are you?
Happy Investing!
Until next time …
As someone deeply immersed in the world of investing, I've not only studied the theories and strategies extensively but also applied them in practical scenarios. My expertise spans various investment methodologies, including value investing and momentum investing, which are central to optimizing portfolio performance and navigating the complexities of the financial markets.
Let's dissect the concepts mentioned in the article:
-
Value Investing:
- Definition: Value investing is a strategy where investors seek out stocks that are undervalued by the market. The approach involves buying stocks that are trading at a price below their intrinsic value.
- Approach: Value investors focus on fundamental analysis, examining factors such as company financials, earnings potential, and growth prospects to identify stocks with strong underlying value.
- Key Figures: Warren Buffett is perhaps the most famous proponent of value investing, having built his massive fortune through disciplined adherence to value investing principles.
-
Momentum Investing:
- Definition: Momentum investing involves capitalizing on the recent price trends of stocks, with the belief that stocks that have performed well recently will continue to do so in the near future.
- Approach: Momentum investors rely on technical analysis, market sentiment, and quantitative indicators to identify stocks with upward price momentum.
- Differentiation: Unlike value investing, momentum investing focuses less on fundamental analysis and more on short-term price movements.
-
Investment Mindsets:
- Value Investing Mindset: Value investors typically have a long-term perspective, aiming to buy and hold undervalued stocks until they reach their intrinsic value.
- Momentum Investing Mindset: Momentum investors often have a shorter investment horizon, capitalizing on short-term price trends and market sentiment.
-
Market Dynamics:
- Interplay Between Value and Momentum: While value and momentum investing are distinct strategies, market conditions can influence their relative performance. In some cases, value investing principles may align with momentum strategies, especially during market fluctuations.
- Market Volatility: Investors need to adapt their strategies to market volatility, with value investors typically staying the course during turbulent times, while momentum investors may adjust their positions more frequently.
-
Investor Types:
- Value Investors: Viewed as patient and disciplined, value investors focus on building long-term wealth through prudent investment decisions.
- Momentum Investors: Often perceived as speculators, momentum investors seek short-term gains by capitalizing on market trends and sentiment shifts.
Understanding the nuances of both value and momentum investing is crucial for investors to develop a strategy aligned with their risk tolerance, investment goals, and market outlook. By incorporating elements of both approaches, investors can construct resilient portfolios capable of navigating diverse market conditions and achieving long-term success.
