Practicing Patience: Momentum Investing

by | Dec 1, 2016 | Asset Management

In addition to knowing momentum investing, Gary Antonacci also writes very well. So I’m not surprised he cranked out an excellent piece recently.

In discussions with investors, and in our writing, we stress so many times about looking long term. In difficult years, discussing the merits of patience can be a crutch.  But patience truly is a necessary ingredient for success with investing.

Many of our investment decisions (but not all!) are based on momentum principles. With momentum, investors look to own areas of the markets which ARE moving up. So, in a sense, momentum investors are going to be chasing the leaders, not digging for value.

The Advisors’ Crutch

So, to lean a bit on our crutch, this IS a problem — in years like 2016 — where (for most of the year) there WAS no leadership.
There were short periods of time where:
— bonds and yield-oriented investments led
— large cap grabbed the flag, and
— gold and other commodities rose to prominence
Over most of 2016 (in fact, going back to summer 2015), no group held a sustained leadership edge over other areas of the market.  Hard to find momentum investing working anywhere.

These frustration periods DO happen, and they ARE maddening for momentum investors. The real pain comes when the client (or the advisor) decides it is time to “rip up the script” and move on to a new strategy.

Often, we hear other advisors inform us “momentum investing is broken” or “momentum no longer works.” That is precisely when we remind ourselves to stick with what we know, and reinforce the understanding there are ALWAYS periods of change in the market. We have faith that our charts and indicators will lead us to what is working.

Transferring Wealth

Wrapped in Mr. Antonacci’s comment regarding the big picture and patience was this gem from Warren Buffett (which I had nearly forgotten). Buffett said “the stock market is a mechanism for transferring wealth from the impatient to the patient.”

And 2016 will turn out to be a good test.

Another gem from Antonacci’s post: “those who look at performance frequently do not do as well as those who are less concerned with short-term performance. When someone asks me how my models are doing this year, I know they do not have a good understanding of momentum investing being a long-term approach.”

After working with individual investors for over thirty years, I can also verify this is true. When I receive those kinds of questions from investors, I want to have a direct conversation right away, to make sure we (client and advisor) are on the same page.

I encourage you to follow the link to Mr. Antonacci’s blog and read on: