Momentum works – until it doesn’t. Here’s a smarter way to build wealth.
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Hello reader.
Tom Young here with today Smart money.
In early 2005, Staples launched a new advertising campaign that introduced the world to the “Easy” button.
Soon customers started asking where to buy this button. By the fall, the office supply store chain had turned the advertising prop into a money-making product. Staples will sell nearly 1 million units within the first few months, and more over the coming years.
Now, wouldn’t it be great if investors also had a similar button to press?
Well, maybe they do.
batch Investing has become one of the easiest ways to move forward. The strategy is simple: buy stocks that were rising, and sell stocks that were falling.
While momentum can yield quick gains, patience has historically yielded greater gains.
So, on the day Smart moneyI’ll share with you why the best long-term returns often come from a mix of turning stocks and fast-growing companies that trade at fair prices.
Then, I’ll show you where to find them.
Momentum trap
There’s a reason we chase the hottest stocks in the market. Since 2014, investors have been able to use a surprisingly simple strategy:
- Start with the Russell 3000 Index.
- Buy the top 10% of stocks based on their performance over the past six months.
- Sale less than 10%.
This strategy worked: Winning stocks rose 12.3% over the next year, while losing stocks returned 7.5%.
For many years, it seemed like you didn’t need deep research or complex financial analysis. Simply buying stocks that were already rising was often successful. This has been the story for much of the market for the past decade-plus.
But over longer periods, the results reverse.
After removal Penny stocksFinancially weak companies, and companies whose sales or profits declined yesterday Losers Become the best investment. Over the next 24 months, previous winners returned 8.2%, but carefully selected previous losers returned 13.5%.
In other words, it is possible to follow an “easy” strategy in the short term (i.e. chasing momentum). But chasing winners also comes with risks.
Investors who piled into hot stocks before the crash in 2000 or 2008 suffered huge losses. (Recently, Micron Technology Company (in) The 25% drop showed how quickly high-flying stocks can fall.)
That’s why the best long-term returns come from a thoughtful selection of turnarounds paired with faster-growing, more affordable names.
Of course, buying well-priced companies over the long term is a challenge. Declines often occur in the first year of stability before a rebound occurs in the second year.
It is considered Nvidia company (NVDA)now the most valuable company on Earth. An investor who bought specifically when ChatGPT launched in November 2022 would see gains of approximately 1,100%.
However, determining the right timing was difficult. An investor who bought a year ago would have experienced 50% losses. Anyone who walked out at that point would have done so at the worst possible moment.
Why trades win
in Fry investment reportOur strategy is to look at the “boring” things. Undervalued stocksLike a copper miner Freeport-McMoRan Corporation (FCX). Freeport itself was purchased in 2020 after a roughly 35% decline the previous year.
It has now reached over 250%. Eric has made multiple triple-digit wins along the way.
In fact, many of us do Fry investment report The best performing stocks have performed well precisely because they were bought during declines.
The key is to look at companies that have underlying stories to back them up. Like a great bottle of wine or a first-class airline ticket, the lower these prices are, the more attractive they become.
Even in the face of painful short-term moves, we are happy to buy these strong companies and then check them out in 24 months. It’s only a matter of time before their quality shines through the prices.
Bottom line: By buying turnarounds, investors are setting themselves up to triple the potential returns offered by the “easy button” of momentum investing. It’s not an easy way to invest, but it can be more rewarding in the end.
Until next time,
Thomas Young, CFA
Market Analyst, InvestorPlace
