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Chapter 12. It's All Upside: The Momentum Story

Chapter 12. It's All Upside: The Momentum Story

Big Mo'

Martha believed in getting a good start to each day. She was convinced that a day begun well would only got better, whereas one begun badly would go downhill. She carried this philosophy into her investing as well. She bought only stocks that had gone up significantly in the months before, believing that the stock's surge would act as inducement for other investors to buy it, thus creating a self-fulfilling prophecy. When asked about whether she was worried that the price may have gone up too much, Martha responded that it did not matter to her as long as she could sell to someone else at an even higher price.

Martha noticed that the stocks in her portfolio almost never did as well when she held them as they had before she bought them and that their prices were extraordinarily volatile. She also discovered that even small pieces of bad news sometimes triggered spates of selling in some of her stocks, quickly wiping out any potential gains she may have made in the previous weeks. Much as she wanted to believe that good things led to more good things, the rule did not seem to work for stocks. Disillusioned, she decided that the market was really not a good place to test out her life philosophy.

Moral: You live by the crowd, you will die by it.


Go with the flow. That, in a nutshell, is the momentum story. The underlying theme is that stocks that have gone up in the past are more likely to keep going up than stocks that have gone down in the past. Variations exist, however, in how you measure momentum. Some investors look at the percentage change in stock prices over a period—a week, three months, six months or longer—and buy stocks with the highest percentage increases. Others incorporate trading volume into their investment decisions, arguing that stocks that have gone up on high volume are the best stocks to invest in. Still others build their strategy around earnings announcements, buying stocks after the announcements report better-than-expected earnings and hoping that the resulting price increases spill over into the following days.


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