Three common mistakes beginner investors make (#3 of 3)

20 Sept 2023 · 2 min

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Beginner investors often chase momentum stocks like Nvidia after big moves, then hold them like value investments. Real momentum investing requires selling when price stops rising, not buying at peaks and hoping. Mixing the two strategies forfeits both the safety of value investing and momentum's profit-taking discipline.

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Common mistakes more beginner investors make. Third is they get momentum investing all wrong. There is actually research, substantial research that shows that momentum investing is one of the few factors to outperform over time. There's actually research that shows this. Quality is one factor. Value is one factor. Small cap for a long time was a factor and momentum was a factor. Well, momentum investing, I'm not an expert and I don't practice it, but momentum investing is you buy as the stock is going up, but then you sell as the stock is going down. And the research shows that does well. Well, you've got investors today that are getting momentum all wrong. They buy into stock strength. They buy Nvidia at a trillion-dollar market cap after it releases its AI chip, after people fall over themselves trying to get into this stock. So they buy at the top, but then they implement a buy-and-hold-forever strategy. They're combining momentum with buy-and-hold value, but you can't do those 2 things because value, you have to buy cheap. You have to buy when there's a margin of safety. So what they're doing is they're buying into strength, buying as a stock is reaching a peak, buying as there's a manic fever dream of buying taking place, but then they don't sell. So it's not momentum and it's really dangerous. I think it's really dangerous. They're practicing only half of the momentum trade.