Momentum Losing Momentum?
Board: Value Hounds
The past couple of weeks have been a nightmare for a lot of the momentum(?) stocks investors have loved the most over the past year give or take.
There was a thread upstream about Daring to Be Great
The question we all ask ourselves and why we invest:
• Is the efficient market hypothesis relevant? Do efficient markets exist? Is it possible to "beat the market"? Which markets? To what extent?
Even though it seems obvious, the only way to beat the market is not to follow the big trends and what everyone else is doing. That would include staying away from the big momentum names when they have become household names and the stocks everyone has to have. You can usually find these in the financial news over and over and over and they are the ones where there is frantic buying, all good news and making new highs regularly. These are consensus ideas and the stocks everyone wants to own regardless of price/value.
Non-consensus ideas have to be lonely.
By definition, non-consensus ideas that are popular, widely held or intuitively obvious are an oxymoron. Thus such ideas are uncomfortable; non-conformists don't enjoy the warmth that comes with being at the center of the herd. Further, unconventional ideas often appear imprudent. The popular definition of "prudent" – especially in the investment world – is often twisted into "what everyone does."
Things like mutual funds run as a pack quite often and tend to buy the things everyone else is buying mostly after the company has gained wide acceptance and a lot of fans. My parents once held at least 7 well-known large cap funds that had nearly identical holdings in most of the best loved stocks of the day. Their returns were terrible and yet they couldn't understand why it was bad to keep hanging on to these underperforming copycat mutual funds.
No, the solution can't lie in rigid tactics, publicly available formulas or loss-eliminating rules . . . or on complete risk avoidance. Superior investment results can only stem from a better-than-average ability to figure out when risk-taking will lead to gain and when it will end in loss. There is no alternative.
That brings us to some of the most loved hottest properties on the market--stocks that are called momentum stocks. Over the past year there have been some sectors and some individual names that became must-haves for almost every investor that could read a financial article and decipher a ticker symbol. The names Netflix, Tesla, Stratasys become household names along with most of the biotech sector and 3D printing. Heavy buying at the top has recently proved disastrous for the trend followers as most of these are down disproportionately compared to the broader market in the recent sell offs.
This brings us in a roundabout way to the seeds of the momentum stocks planted in a portfolio years or even decades ago that looked like crazy ideas at the time and unlikely to ever bear fruit
"Being too far ahead of your time is indistinguishable from being wrong." The fact that something's cheap doesn't mean it's going to appreciate tomorrow; it can languish in the bargain basement. And the fact that something's overpriced certainly doesn't mean it'll fall right away; bull markets can go on for years. As Lord Keynes observed, "the market can remain irrational longer than you can remain solvent."
Buying DDD two years ago under $20 would give you market crushing (to quote TMF) gains. In 2012, you would have been contrarian and alone on the future of 3D printing.
Netflix when it was a DVD by mail business took vision to buy into and a definite contrarian bent
Who was buying the mighty amazon when it was a small niche online bookseller--contrarians
The commonality is there was a time when all of these were the outside the lines investments Marks thinks will produce returns ahead of the pack and that momentum stocks go through a life cycle just like everything else. By the time they are reaching new highs and are on everyone's must have list, they may not be the best use of investment dollars and doom you to underperformance. Getting in ahead of the consensus has paid off phenomenally.
Momentum investors are getting massacred this week as big names drop much farther and much faster than the market itself. But buy early enough and hang on and you still look golden. Taking David Gardner as an example of an investor that bet early and contrarily on most of these--
his side of the Stock Advisor has taken a pounding down from its highs in the past six weeks or so dropping around 26% while the market is off about 3% from its recent highs. However, he is insulated against underperformance because these were bought so early in the cycle, he is still beating the S&P by 200%.
Not sure what this can do to shape the individual investor --maybe you all have some conclusions about early adoption, investing in the unloved and outperformance?
Investors who aspire to superior performance have to live with this reality. Unconventional behavior is the only road to superior investment results, but it isn't for everyone. In addition to superior skill, successful investing requires the ability to look wrong for a while and survive some mistakes. Thus each person has to assess whether he's temperamentally equipped to do these things and whether his circumstances – in terms of employers, clients and the impact of other people's opinions – will allow it . . . when the chips are down and the early going makes him look wrong, as it invariably will. Not everyone can answer these questions in the affirmative. It's those who believe they can that should take a chance on being great.