I’m a momentum investor.
Yes, I use an assortment of factors in my investment process — six primary factors go into the engine I use to power Green Zone Fortunes.
But momentum is critical for me, and it permeates everything in my trading.
Momentum investing works, for reasons I’ll explain in a minute.
But it’s even more important in a year like 2022, when the market has struggled. A well-built momentum model keeps you out of danger with investments in assets that are trending higher.
It also keeps you out of the assets that are trending lower!
What Is Momentum?
You’ve heard the expression: “Buy low and sell high.” It’s intuitive and is the basic foundation of value investing.
Momentum investing is similar … but different. Rather than buy low and sell high, we’re looking to buy high and sell higher.
And it works.
Momentum investing has a 200-plus year track record of success. While many investment strategies have a shelf life — they reach a point where they quit working — I believe with 100% confidence that momentum investing will continue working forever.
There may be tweaks to specific strategies over the years, but the concept of following an uptrend — of buying high and selling higher — is eternal.
Why Does It Work?
To understand why momentum investing works, you need to understand how the market works.
No matter how much they teach it in business schools, the stock market is not a fine-tuned machine…
It’s not mechanical or robotic…
It’s a collection of people buying and selling, nothing more and nothing less. And those people make decisions based on imperfect data and on predictions of what earnings might look like years, if not decades, from now.
But beyond this, behavioral biases play a big role. Thinking is hard work. So our brains take certain shortcuts to ease the strain. And our emotions compound these effects.
That leads to “herding bias.”
You’ve heard of groupthink. We’re programmed to seek strength in numbers. In a primitive hunter-gatherer society, this was a matter of survival!
But in the modern stock market, it contributes to stocks trending higher or lower. Investors pile in … or jump out … together.
Along the same lines, we also have “confirmation bias.” We seek out and believe information that confirms what we already believe and ignore information to the contrary. If we’re long a stock, we look for reasons for it to keep rising.
But perhaps most relevant to the momentum effect is what I call the “limited attention bias.”
Humans underreact to small bits of information that are revealed over time and overreact to information that is delivered all at once. We’ll see stocks trending higher or lower as investors “catch up” to their prior underreactions.
I could go on all day, but I don’t need to convince you that people aren’t rational all the time. That part is obvious!
Bottom line: This irrational behavior creates opportunities for us to exploit.
In Green Zone Fortunes, my emphasis on momentum investing has helped us to sidestep a lot of the volatility that has wrecked the market this year. It’s kept us invested in the sectors that are working, like energy!
And if you want to see how we’re investing in the future of this sector, you need to watch my “Infinite Energy” presentation.
My No. 1 stock in the renewable energy mega trend is up 45% since I recommended it in March. It marched higher while the rest of the market sank lower.
That’s momentum at work!
To find out more about this recommendation — and to see how you can gain access to more like it — click here.
To good profits,
Adam O’Dell
Chief Investment Strategist