======Momentum Investing======
Momentum Investing is an investment strategy that bets on the continuation of existing market trends. The core idea is simple and alluring: winners keep winning, and losers keep losing. Momentum investors buy stocks or other assets that have shown strong price performance in the recent past (typically over the last 3 to 12 months) and often sell, or [[Short Sell]], assets that have been performing poorly. This approach is the polar opposite of the contrarian nature of [[Value Investing]], which seeks to buy undervalued assets that are currently //out of favor//. Instead of digging into a company's financial health to determine its [[Intrinsic Value]], momentum investors are essentially "trend followers" who focus on market sentiment and price action. They believe that the upward or downward momentum of a stock's price will persist for some time. This strategy is heavily rooted in [[Technical Analysis]] and market psychology, rather than the [[Fundamental Analysis]] that underpins a value-based approach. It’s about riding the wave of popular opinion, not about owning a piece of a great business at a fair price.
===== The "Why" Behind the Momentum =====
If markets were perfectly efficient, momentum shouldn't consistently work. Yet, academic research has identified it as a persistent market anomaly, or [[Factor (Investing)|factor]]. The reasons are believed to be more psychological than financial.
==== Behavioral Biases ====
Human psychology plays a massive role in driving stock prices, often leading to trends that can be exploited.
  * **The [[Herding Effect]]**: People are social creatures. When a stock starts rising, it attracts attention. As more investors jump on board, they push the price even higher, creating a self-fulfilling prophecy. This is often driven by a "fear of missing out" (FOMO).
  * **Slow Reaction to News**: Investors can be slow to react to good (or bad) news about a company. Initial positive news might cause a stock to rise, and as more investors gradually digest the information, the upward trend continues for months.
  * **[[Confirmation Bias]]**: Once an investor buys a rising stock, they tend to seek out information that confirms their decision was a good one, while ignoring negative signals. This collective bias helps fuel the stock's continued ascent.
==== Institutional Factors ====
Professional money managers can also contribute to momentum. For example, some portfolio managers engage in "window dressing"—buying recent top-performing stocks near the end of a quarter to make their holdings look more impressive to clients, further driving up the prices of those winners.
===== How Momentum Investing Works in Practice =====
A momentum strategy is dynamic and requires constant monitoring. It's not a "buy and hold" affair.
  - **The Look-Back Period**: An investor first defines a "look-back" period to identify the winners. This is commonly the past 3, 6, or 12 months. They rank stocks based on their performance over this period.
  - **The Holding Period**: The top-performing stocks are then purchased and held for a predetermined "holding" period, which might be a few weeks or several months. The expectation is that the momentum will carry forward during this time.
  - **The Rebalancing Act**: At the end of the holding period, the process is repeated. The portfolio is re-evaluated, old "winners" that have lost steam are sold, and a new batch of top performers is bought. This constant buying and selling leads to very high portfolio [[Turnover]], which in turn racks up [[Transaction Costs]] and can trigger significant tax bills.
===== Momentum vs. Value: A Capipedia Perspective =====
From a value investor's standpoint, momentum investing is a fundamentally different—and often riskier—game. While a value investor thinks like a business //owner//, a momentum investor acts more like a stock //renter//, only interested in its short-term popularity.
The primary dangers of momentum investing are:
  * **The [[Momentum Crash]]**: Momentum works until it doesn't. Trends can and do reverse, often violently and without warning. When sentiment shifts, the same herding behavior that drove prices up can cause a stampede for the exits, leading to a swift and brutal crash in high-momentum stocks. It’s like a game of musical chairs; it's fun until the music stops.
  * **Buying High**: The strategy explicitly involves buying what is already expensive and has run up in price. This means you are often buying into the hype, which is a precarious position to be in. The greatest risk in investing is paying too high a price, and momentum strategies systemically encourage this behavior.
  * **High Costs and Complexity**: Successful momentum investing requires discipline, a systematic approach, and a stomach for volatility. The high turnover also means costs can eat away at returns, making it a difficult strategy for the average individual investor to execute profitably over the long term.
In conclusion, while momentum is a recognized market factor, it's a strategy built on skating on thin ice. It relies on predicting the psychology of the crowd, a notoriously fickle endeavor. For the patient, long-term investor, focusing on the durable value of a business remains a far more reliable path to building wealth.