The Perfect Blend between Momentum and Value Investing

stride-the-perfect-blend-between-momentum-and-value-investing-homeOne of the very first steps of investing is determining which investing strategy suits you the best.

Investors share the same goal - to make the most money possible, but the amount of risk a person is willing to run is what separates investors from one another and ultimately leads to the decision of a preferred strategy. Some investors have a thirst for risk and others are totally risk averse. Allow me to introduce you to my fictional investing buddies Dave, the careful and risk averse value investor and Steve, the opportunistic momentum investor.

Value Investing

Dave is a value investor that enjoys low risk investing over the long term. He buys stocks that are trading at a discounted price of its intrinsic value. For instance, Dave buys a share that is trading at 50 cents to its intrinsic value of $1. After purchasing his shares, Dave has to patiently wait for the market to swing around and send his newly bought stocks soaring far beyond its intrinsic value. He is confident that this will happen in time, because the business has great fundamentals and is undervalued.

Waiting patiently for your stocks to regain its worth can become a very tedious and stressful experience. For instance, Dave bought his shares when it was trading at 50 cents, which was a great buy at the time, but now the share price starts falling. It falls from 50 cents down to 40 cents and then to 30 cents. This means since his initial investment Dave’s shares are down by 40% in share price.

Inevitably Dave has booked himself a seat aboard the emotional roller coaster by buying too high on the down slope. This is a common occurrence for value investors. Luckily we know that the market will eventually swing around and the stocks he bought will recover, but we don’t know how long that might take.

Momentum Investing

Steve the momentum investor only buys stocks that are showing signs of an uptrend motion. He only buys when stocks are growing and sells when they start falling. He doesn’t base his buying decisions on the valuation of a company, but rather on the company’s performance. For instance Steve will buy a company’s share at $1.25 even though the intrinsic value might be $1 and he will hope to sell it for $2.

What commonly occurs with momentum investors is that they buy the stock at $1.25 and when it reaches their target exit point of $2 they sell it. But now they see that the stock keeps climbing the charts, so they buy in again on a high and as fate will have it the stock starts falling, causing Steve to lose all the money that he made from his initial investment. What also happens is they buy a stock showing great growth and momentum, without any regard for the value of the stock. Just days after buying the stock it falls short of expectations and hits rock bottom leaving momentum investors with nothing but remorse. A good example of this is Lakeland Industries, Inc. (NASDAQ: LAKE), a hazmat suit manufacturer, that saw a tremendous spike in share price because of the Ebola epidemic. Its stocks were doing great until the epidemic was said to be under control, causing the share price to drop from a high of $29 to $21 overnight. Today it is trading at $12.24.

The Perfect Blend

Comparing these two situations shows you that Dave and Steve can both benefit from integrating their investing strategies. By combining the two strategies you will ultimately have the holy grail of investment strategies, because each strategy makes up for the other one’s losses. By blending the two you will be able to invest in undervalued stocks that show momentum. You will never have to worry about buying too high on the down slope, because you will be buying as soon as the stock starts recovering from its dip. Buying weak companies will also not be an issue, because you will only invest in companies with strong fundamentals. By applying this strategy you will be able to buy a stock at 55 cents, only see it go upwards and thankfully be skipping the dreaded ride aboard the emotional roller coaster. The risk is less and the rewards even higher.

Combining the two investment strategies are obviously not easy, otherwise everyone would have been doing it. The difficulty comes in when trying to identify a value stock and timing its recovery at the optimal periods.

Applying The Holy Grail of Investment Strategies

STRIDE has recognised the benefits of such a combined strategy and have designed a new timing engine that blends both into the ultimate investment strategy. The new timing engine helps us identify the upswing, recovery or momentum in a stock after a large dip and it also helps us find good targets that are already experiencing upward momentum and have not suffered a dip. Instead of buying weakness the engine is now timed to buy recovery. All the same value investing rules still apply; the price must be below consider buy and all the scores must be in place for the engine to target a stock as a buying opportunity. The new timing engine ultimately offers the same great STRIDE-targeted companies with better returns, less stress and it doesn’t waste valuable time. It gets you in earlier on outright winners and buys the recovery of unloved shares. You can learn more about the new timing engine by reading: Optimised Buying Opportunities with the New Timing Engine.

By adapting to the new strategy, both Dave and Steve will save a considerable amount of money to reinvest, have less financial stress and fewer grey hairs to worry about.

Download our complimentary eBook to learn about the principles and dimensions of STRIDE as well as how to become a 3D Value Investor.

STRIDE's practical guide to value investing for beginners: starting your portfolio

Topics: 3D Value Investing


3D Value Investing: Triangulating The Best Investment Targets

3D Value Investing uncovers the best businesses for investment, the fair value of those businesses and the best times to buy in and sell out. This approach to long-term investing results in higher returns with lower risk.

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