With thousands of stocks to choose from, it becomes difficult to identify winners that will yield multiple returns year after year !
Going through financials of each company to shortlist them for investment may not work in the stock market where logic is overtaken by Greed and Fear.
What might appear cheap to a fundamental analyst may continue to remain so for a very long time. And what appears overvalued may continue its skyward journey.
For you to select good quality stocks that help in creating wealth, it becomes important to look at what works in the stock market. The answer is MOMEMTUM !
We will discuss Momentum as a stock picking tool and also discuss how to minimize risk on your overall portfolio.
What is momentum?
In simply terms, “that which goes up, will continue to go up!” and “that which goes down, will continue to go down !” this is how i understand momentum in stock market.
It is human nature to be contrarian and to try and predict tops and bottoms. And momentum investing is about buying stocks near their life time highs !
Where to get the stock list?
Only consider the stock from the top tier of the Index.
How to filter stocks for investing?
Now that you know where to get the stocks from, the second step is How to filter amongst this list.
Filter criteria are listed below:
- Must have high trading volume (top 30) over the last 6-12 months
- Must have given positive returns over the last year
How to minimize risk?
Once the where and how of stock selection is sorted out, the next factor is to determine about minimizing risk.
When to exit or book profit?
when the stock no longer displays momentum. Check the selection criteria discussed above.
I’d keep a 20% drop from its all time high to exit a stock. You can come up with your own number.
20% range give the stock breathing space and let’s you stay put in the stock rather than be stopped out only to realize that the stock momentum has continued.
How often to Churn?
Churning your portfolio would happen only when you have one stock exit and a slot has opened for another stock.
you can keep an eye on your investments once a week. And avoid the temptation to book profit or loss.
While i did not back up my article with market study or statistics, I’ve given you enough to think about.
It is true that momentum investing strategy works and has beaten the Index return.
It also has proven to be less risky.
I’d encourage you to consider Momentum investing to create wealth over long term.
I’d recommend the follow books on Momentum investing: