What was the best investment style: value, growth or momentum investing ?

22 September 2018

Dear Fellow Investor,

A study was made  about investment styles in the US going back to 1896.   The question was what was the best investment style: Value, growth or momentum investing ?

The conclusion was that sometimes value investing works while in other times growth works.  Momentum, however; always works until it doesn’t.

Momentum means if a trend is established there is a tendency of trend continuation. Trends will persist as more and more players join the party.

This is based on emotions and crowd psychology.

Witness the FANG stocks, Facebook, Amazon, Netflix and Google. They continue to make new highs oblivious to nose bleed valuations. The PE of Amazon presently is over 155 which means it takes 155 years to get back the value of the share in terms of earnings.  The growth and momentum crowd continues to buy and make money while the value investor sits on his hands and waits.

At some point the party will end.

It reminds me of a story of a Dutch East India ship which sank in off the coast of Kent, England  in 1740.

The excavators discovered a lovely haul of gold and silver coins. The  not so lovely bit is that the coins were sewn into the clothing of the 234 sailors. The gold and silver coins did not help the sailors  in their watery graves.

My style of investing is combining value with momentum.  It works most of the time as we buy a share when it is attractively valued and there is evidence of insider smart money buying. We buy at a major support off the weekly price chart as price breaks through resistance on abnormally high volume. High volume means participation and interest in the business. Sometimes these breaks signal the beginning of a new trend where the risk is relatively low. If the break fails the risk

to below support is relatively low. We get out before the ship sinks.

In the case of Amazon it is like the East India ship. The sailors have their gold and silver coins sailing toward their port in a calm sea. They are imagining coming back to their families  with their new wealth- perhaps thinking of buying a new house or funding their children’s education.

Suddenly disaster strikes, the ship sinks  and all is lost. This can happen in the stock market to those who are not prudent or diversified or those who chase high valuations.

Our recent purchases of Maybank and Genting Resorts   are value stocks trading at a low base showing evidence of insider buying representing momentum building at an early stage. The well covered dividends will reward us as well as the solid fundamentals and low valuations.  

Invest well and grow your wealth

Bill

Critter of the week is a large jungle cat which we saw in Zoo Negara last week. The trainer trained the cat to walk a bar next to the crowd and for his effort was given a juicy fish.