Deepak Shenoy succinctly describing what momentum investing is.
In the financial world, our job is to react to change. Not to predict it, because predictions are folly. You can predict a hundred things, and one of them is bound to happen, so you can say you were right. No one sees the ashes of the ones that went wrong.
Reacting is easier. You wait till something becomes a trend, enough for it to sustain. And then you get in. You’ll never get in so early you can be called a soothsayer. You’ll get in after enough people have done so, at a higher price. And in the same way, you’ll be able to get out much after the top, but before the really bad damage hits. In the markets, we say – you might give up the first 10% or the last 10%, but at least you can get 80% of the trend.
In so many ways, that is what momentum is. The trend is established and accelerating. A stock makes a new all time high. And if you just systematically buy those stocks, you’ll win on a few of them that go on to make the 2x, 3x, or indeed, 4x returns that some stocks have seen. And when you lose, you lose 10% or so, and one big winner makes up for enough losers.
Wealth Letter July 2021: Following the Disruption