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Sick of trying to follow a value investing strategy? How about giving momentum investing a try…

by , 12 November 2014

Investors are always on the lookout for investment strategies to help them make money on the stock market.

One popular strategy is buy low and sell high, otherwise known as value investing. This works on the premise of finding cheap, unpopular shares that the market is ignoring. You buy and wait for everyone else to catch on.

Yet there's another strategy that's proving profitable. But some investors find it difficult to get their heads round.

Let's take a closer look at this investment strategy…

Understanding momentum investing

This investment strategy works on the premise of buy high, sell higher.

The idea behind momentum investing is you buy an asset that’s recently been rising in price. Then you hope the trend continues for long enough so you can make money from it.

You can apply momentum investing to a number of different assets, including commodities, shares, bonds and currencies, Phil Oakley in Money Week explains.

You can also use apply it the other way round. So if an asset is falling in value, you can short it in the hope that the price will continue to fall and you can buy it back at a lower value, banking a profit.

Unlike value investing, which pays a lot of attention to the underlying fundamentals at work, momentum investing ignores these. You don’t need to bother about growth, profits, prospects or valuations.

That’s because the basis of momentum investing is purely whether a price trend will continue.

By ignoring fundamentals, momentum investing appears risky and extremely speculative. But historically, the strategy has worked well.

Momentum investing has a good track record

For instance, James O’Shaughnessy in his book, What Works on Wall Street, showed compelling evidence that momentum investing was a great way to beat the stock market.

He showed that if between 1927 and 2009 you bought the 10% of shares with the strongest price gains over the previous six months in the US and held them for one year before repeating the process, you’d have banked 14.1% annually.

That’s nearly 4% higher than how the market performed on average per year.

He also found that the strategy worked well over shorter time periods.

So there you have it. Why you could give momentum investing a try if you’re sick of following a value investing strategy

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Sick of trying to follow a value investing strategy? How about giving momentum investing a try…
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