Momentum trade is market's short-term steamroller
Momentum investing delivers short-term gains but risk of a bubble burst makes it a dangerous game for value investors.
Gulf Business Weekly Editorial Desk
Editorial Analyst
In the investment world, blindly following market trends is known as momentum. When momentum takes off, investors who select stocks based on fundamental criteria start to trail their benchmarks. Disappointed clients withdraw their money, and the temptation for a value fund manager to capitulate becomes overwhelming.
Quantitative investors often use momentum as a counterweight to value-based picks. The veteran investor Jeremy Grantham describes momentum as the yin to value's yang. A portfolio allocation to momentum stocks reduces tracking error when value trades perform poorly, helping to retain clients.
However, the trouble is that when the bubble bursts, the belated decision to join the herd usually turns out to be a costly mistake. The travails of Fundsmith, the UK investment firm, illustrate this dilemma. Investors who chase momentum risk being caught in a short-term steamroller that eventually crushes returns.
Original Sources
Gulf Business Weekly Editorial Desk
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