Momentum and Time frames

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The following was part of a note written to subscribers. Hope you find it useful

We bought the stock a year back and added to it in December. Since then, the stock price is up 70%+. In the interim, the price doubled and then gave up some of those gains. Our buy price and fair value did not change as much during this period, which shows that business performance does not swing as much as the price

Like several other companies, the stock went from a value/ growth to a momentum play in a matter of months

When we make an investment, it is with a 2-3 year ‘rolling’ horizon. We have a 2-3-year view, but if the company keeps performing, the horizon gets extended. After a few years, if you look at the holding, it seems to be a buy and hold position. However, the ‘hold’ part is always conditional on the performance of the company

In contrast a momentum investor buys a company, when it shows up high on their momentum list (highest returns in the look back period), with their own unique set of adjustments. The time horizon for such investors is much shorter. Momentum works for 6-9 months on average and requires such investors to exit and replace with new stocks which appear on their list

Same stock, different approach

Both the investors may be invested in the same stock but are playing a very different game with a different time horizon.

The price of the company, however, is impacted by the action of all the investors, irrespective of their motivation. A loss of momentum is further compounded by the exit of such investors/traders.

I am not making a moral argument in the above and there is nothing good or bad about it. It is stupid to accuse other investors of disturbing your game. We need to aware of what is happening but be clear about our motivations.

We have a longer time horizon with focus on the long-term performance of the company. If the execution falters, we will exit. Till then, we wait and watch

In the meantime, we will not do momentum or short-term trades with our positions. Doing so would be stupid on our part. If we want to play the momentum, then the approach is very different (regular, pre-decided exits). Mixing the two leads to the worst of the two worlds

 

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By Rohit Chauhan

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