Along the lines of “the trend is your friend…” – GMO’s quarterly update (which I’m a little late reading) contains insights on momentum investing, which seems to be all the rage these days as markets are either all in or all out in either direction:
“One of the fundamental risks in running a price-based stock selection metric like momentum is the possibility that market themes can shift quickly and leave you holding a portfolio full of the last theme’s stocks. Momentum metrics experienced such a fate in mid-2011, when the flight to safety left them holding significant exposure to firms levered to rising commodity prices. As investors sold off riskier, more economically exposed companies amid the Europe-induced spring sell-off, momentum lagged.”
To me, price is always the most important element of any investment approach, but true trends are not made up merely of price, but of macro and micro trends. Finding those trends is easier said than done, but the momentum of price, as chartists often use it, is merely a representation of a fundamental macro or micro trend (I often say pure chartists are just lazy fundamental investors!). When you can understand the monetary system, the macro and micro drivers of the system and a way to benefit from the way this is all intertwined, only then have you found a truly sustainable case of momentum.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.