Investing Basics: Momentum investing – how following a trend can work wonders for your retirement pot
Douglas Chadwick, Founder and Chairman of Saltydog Investor, explains that ‘momentum investing’ is a proven way of making money in the stock market; ‘buy high and sell higher’
When we think of trends, we might think of things like fashion, cuisine, interior decoration or garden design; not many of us think of trends and investment funds in the same sentence, but we should.
Trend Investing – also known as ‘trend following’ or ‘momentum investing’ – is a proven method of making money in the stock market and goes back over one hundred years. It’s fascinating how trend investors in very different times, and places, have come up with uncannily similar rules for making good profits.
There are four basic rules for success.
- You must have a constant supply of accurate up-to-date fund performance data.
- Don’t always be invested in the market; in times of market uncertainty, cash is a good home for your money.
- Test the validity of a new trend with small investments first.
- Once a trend is established it’s more likely to continue in that direction as it gains momentum, be it up or down.
Jesse Livermore, one of the most famous and successful momentum investors from the last century, is quoted as having said ‘If after a steady rise the stock levels off and turns down with only occasional rallies; it is obvious that the line of least resistance has been changed from upwards to downwards. There is no need for explanations, now is the time to sell’. The reverse is also true and then it is the time to buy.
‘I had believed that financial advisors actually ‘advise’, that wealth managers actually ‘manage’, and that the financial industry has individual investor’s best interests at heart’
Perhaps now is the time to discuss briefly the origins of the Saltydog investment system. I spent my formative eight working years in the Merchant Navy, finishing up as a navigator, before going to university as a mature student and gaining a degree in theoretical physics. In 1975 I formed my own flat pack furniture manufacturing business selling it successfully ten years later. In 1988 I formed another business, also selling flat packs to the likes of IKEA and MFI with significant contracts in America and throughout Europe, retiring from this work in 2008. You should be able to tell from this brief resume that I am reasonably numerate.
After the sale of the first business in 1985, I was advised by an IFA to invest some money into two investment bonds. Fifteen years later, when I started to take an interest in the performance of these investment bonds, I was ashamed to find out that they were just marking time and going nowhere. It made me look stupid and a fool for trusting the IFA to manage this investment.
‘I feel that the financial markets should be demystified’
A big lesson learnt; like so many people, I had believed that financial advisors actually ‘advise’, that wealth managers actually ‘manage’, and that the financial industry has individual investor’s best interests at heart.
Enough was enough, it was time to take control myself, and thus began the road that lead to the Saltydog trend investing system.
At first I simply pored over the performance numbers of around seventy funds, and over the months it became obvious that patterns were emerging. Some funds would move together in the same direction, up or down, as if in tandem. After several months of researching this phenomenon it dawned that these funds were in the same sectors of the market.
‘on a mission to empower retirees and all lay investors, young and older to take control of their finances’
There are literally tens of thousands of funds available distributed among thirty or so recognised sectors – now was the time to get serious.
Richard Webb a former colleague joined in and ‘The Saltydog Investor’ came into being. Richard became the Managing Director and designed algorithms that sifted through all of these funds and put them into their correct sectors; it then top slices the best performing funds in each sector, and finally puts the sectors into groups according to their volatility. This information is produced weekly in numerical and graph form.
We are looking for the Usain Bolt’s of the fund world, not the guys at the back of the race; it is obviously more complicated than this, but this is the basis of the system.
I feel that the financial markets should be demystified; the Saltydog team is on a mission to empower retirees and all lay investors, young and older to take control of their finances. The homework has been done and the findings are there on a silver platter. The trick is consistency, regular monitoring and then action; switching funds as and when necessary.
The rise of the internet has enabled cheap trading via many online fund supermarket platforms; the combination of these platforms and access to accurate current information has the potential to revolutionise investing.
‘The momentum investor will buy high and sell higher’
It can be likened to a relay race. When a sector is doing well, then you choose a performing fund from that sector to carry your investment baton, and when that sector runs out of puff, you choose another fund in the next sector that has taken over at the front of the race. The momentum investor will buy high and sell higher whilst ‘riding the herd’, whereas the value investor buys low and anticipates selling high. Personally I would rather buy something that is working today rather than hope that it will work tomorrow.
The financial industry is not set up to help you become a DIY investor; their business model is set up to create earnings for themselves, generated from ‘advising’ you.
This means that your returns have been reduced in order for this to happen. For me it has become all about answering one simple question – will I, or an outsider, have the most interest in securing a well-financed retirement for my wife and I, and also an inheritance for my children? There are no points for answering this. At the end of the day your savings are your baby and nobody else`s.
‘The financial industry is not set up to help you become a DIY investor’
I am reminded of a story that originates in South America. It is worth consideration by anybody wondering whether to take up the baton of DIY investing; it’s called ‘The Mountain’.
There were two warring tribes in the Andes, one lived in the lowlands and the other high up in the mountains.
One day the mountain people invaded the lowlands and as part of their plunder they kidnapped a baby and took it back up into the mountains. The lowlanders did not know how to climb the mountains or even how to track the kidnappers in the steep terrain. Even so, they sent out a party of their best fighting men to try to recover the infant.
The men tried one route after another but in the end they failed to master the climb. They returned to the village and as they were unpacking their gear they saw the baby’s mother coming down the mountain with her baby on her back. They greeted her and asked ‘how did you do this when we, the strongest and most able men in the village failed?’ She simply shrugged her shoulders and said ‘It was not your baby’.
Remember, as the government endeavours to balance the economy and reduce the country’s debt, it cannot give to anybody anything that it does not first take from somebody else.
As a saver and therefore a person of means, they will be coming to you, whether you like it or not. Years ago, I used to have an investment target to produce an income greater than my wife and daughters could spend. I have now modified this to include further contributions to the government of which ever persuasion.
This I can better achieve as a DIY investor.