Be careful when playing momentum – the trend may appear to be your friend, but can quickly turn into a foe
https://myinvestingnotes.blogspot.com/2010/01/be-careful-when-playing-momentum.html
Based on the article (linked above), here is a summary of the key points:
Core Argument: Momentum investing—chasing stocks, sectors, or markets that have recently performed well—is a popular but dangerous strategy that can lead to significant losses when trends reverse.
Key Points:
Popularity of Momentum: It is a favourite and easy strategy in India. People naturally recommend buying recent winners and selling recent losers.
Psychological Basis: The strategy works due to human behavioral biases: investors initially underreact to good news, then overreact as more news comes in, driving prices up further (and vice-versa for bad news).
Ease and Social Safety: Momentum is easy to follow (only past prices are needed) and socially safe, as you are always following the crowd. This contrasts with value investing, which often involves going against popular opinion.
Significant Risks: The major flaw is that trends do not last forever. When a trend reverses, momentum crashes quickly and painfully, erasing years of gains (e.g., the 2007-2008 market crash).
The Religare AGILE Example: This mutual fund serves as a cautionary tale. It performed poorly when market trends reversed, highlighting how momentum strategies can fail spectacularly at inflection points.
Recommendation:
Avoid concentrating your investments in a single strategy like momentum.
Diversify across different investment styles.
If you must use momentum, do so conservatively.
Scrutinize a fund manager's performance during trend reversals, not just during bull markets.
Conclusion: Be very careful with momentum investing. While following the trend can seem profitable, it can quickly turn against you, leading to severe losses.
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