Are you rooting for the Red Sox or the Yankees? Do you like the Florida Gators or Georgia Bulldogs? "Star Wars" or "Star Trek"? Do you prefer the Beatles or the Rolling Stones?
We hear these kinds of arguments all time.
And if you thought the simple pursuit of profit was some kind of common denominator, well, we have these kinds of arguments in investing, too. "Are you a momentum investor or a value investor?" is a question I hear way too often.
It's depressing how the loudest, shrillest voices - obsessed with a fanatical need for purity - insist we take one side or the other, like two choices are all we've ever got.
It's stupid. It's horse hockey, frankly.
I don't care whether you're into momentum, value, or whether you're a closet indexer: If you keep an open mind and use the approach that'll make you the absolute maximum amount of money possible in a given situation, you'll enjoy returns that the value and momentum puritans out there can only dream about.
Leave the endless arguing for the fanatics. Let's go make some serious money...
[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
Two Ways to Achieve One Goal: Juicy Returns
So, in the interest of full disclosure, I favor the value investing school - pretty traditional - with some private equity methods peppered in. The value investing--based approach fits my personality and lifestyle perfectly, so it tends to be what I use to grow my own wealth and to help others grow theirs.
Though it's no longer the case, in the past, I've been kind of partisan to the value side.
Critical: This new trading tool reveals WHICH stocks to trade... WHEN to trade them... and for HOW LONG. It's unlike anything ever released before. See it for yourself here.
But then I got a chance to work on a research project with one of the better-known momentum investors. This guy is rich in the Italian Renaissance sense of the word "rich." He owns a big house on Palm Beach... and a big house in the mountains out west.
I can't remember if it was his indoor bowling alley or indoor shooting range that convinced me. His obvious success was impossible for this value investor to ignore: If momentum investing didn't work, how come this guy was also making money in the stock market?
Being a geek, I turned to the academic research.
It turns out that there are two anomalies that have always worked in the stock market that, for behavioral and economic reasons, should also continue towering pretty much forever.
One anomaly is value, the idea of buying a business at a bargain price and selling it when the markets realize the full value. I have been exploiting the value anomaly for more than three decades; plenty of East Coast bartenders' and booksellers' kids have college diplomas hanging on their walls precisely because I've exploited it.
The other anomaly is momentum. The idea of buying what is hot and holding it until it starts to cool off also works. While the market may be a scale - a weighing machine - in the long run, in the short run, it's a popularity contest. The first academic paper to prove this was written back in 1993 by UCLA professors Narasimhan Jegadeesh and Sheridan Titman. They found that buying recent stock winners and selling recent losers generated significantly higher near-term returns than the U.S. market overall from 1965 to 1989. Many subsequent studies have since shown that momentum works and works well.
Momentum investing requires a different mindset. Momentum captures excess returns in the shorter term; the gains are made over months, not years; it's generally much more hands-on every day than value-oriented investing is most of the time. Turnover will be higher, as much of the success of the strategy depends on getting out as soon as the momentum slows. But if you're willing to put in the effort, you'll likely be richly rewarded.
As you may have guessed, the next step is a no-brainer...
Use Value and Momentum Together to Rake in Profits
Here is where it gets interesting.
The more recent studies have shown that if you combine value and momentum with a 50% allocation to each strategy in your portfolio, you not only earn market-beating returns, you reduce volatility.
Revealed: This one trading tool is as close to a "crystal ball" as you can get. See it in action now.
It seems that because momentum works in the short run and value works in the long run, they are not highly correlated. One is zigging while the other is zagging, but ultimately, they both end up at the destination with returns much higher than the stock market indexes. And because you use both, your ride will be smoother overall.
Arguing about value versus is momentum is as silly as arguing "Star Wars" over "Star Trek." They're both good, but they appeal to a different personality. The person who can learn to enjoy both gets twice as much entertainment value.
Like I said before, value-oriented strategies are more my style, but as the results are undeniably profitable, I've occasionally explored momentum strategies as well.
There are many different ways to invest in momentum, and the concepts can be used among different asset classes and market capitalizations. I also make it a point to keep up with the leading research on both investment strategies.
I'll continue to stay true to my value roots, investing with private equity-style strategies, corporate liquidation value, piles of undervalued real estate and infrastructure projects, of course.
But I'm developing some ideas on putting momentum to work generating high rates of return, synthesizing what I've learned with some of the leading academic research work - the results should be interesting... and lucrative. I look forward to sharing those with my readers when the results are ready.
Interestingly, my kids have no interest in following in Dad's footsteps. But they've been advised, once I'm gone, to hire one value manager and one momentum manager (preselected by the old man, of course) to manage whatever scraps I plan to leave behind in a couple of decades when I'm through having fun.
You Can Make $500... $1,500... Even up to $4,325 Every Day
Tom's new trading tool, the Money Dial, has the ability to identify "flash patterns" in stocks - intervals of time when a stock has gone up or down virtually every day for a prolonged period based on pricing history. In his new video, he'll reveal how to trade these flash patterns so you can potentially make up to $4,325 every day in a matter of hours. Watch and learn...
Follow Money Morning on Facebook and Twitter.
About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.