In the late 1990's many investors fell victim to the momentum investing craze that was sweeping the country. It seemed that no matter what stock someone bought the price of that stock would always go higher and higher. Many new investors even quit their jobs to become day-traders. Unfortunately, this all came to a crashing end when once high flying internet stocks came crashing back to reality.
Momentum investors look for stocks they feel are ready to take off with explosive growth upwards such as the internet stocks of the 1990's. These investors buy stocks that may already be considered high priced with the belief that the stocks are going to continue to go up in price.
In the 1990's simple news stories were sending stocks soaring even if those stories were not necessarily based on facts. Some stocks actually jump as much as 20 points in one day based on rumors alone.
Momentum investing is definitely based on the belief that an extended bull market is in effect. This method also requires a lot of knowledge about technical analysis. The biggest problem with being a momentum investor is you simply do not know for sure when your momentum will run out such as it did in the late 1990's. While a momentum investor may have some success with an occasional huge gain; they will also more than likely get stuck with over-priced stocks that simply take a sudden and drastic turn for the worse. Many professional traders will tell you the average investor will lose if they try momentum investing, because the professional investor will always have the upper hand when it comes to drastic downturns in the market. Therefore, the average investor who is trying to chase a stock higher will be left holding the bag of a stock that will soon be crashing down.
I am personally not a fan of chasing stock prices higher. It simply is a bit too much of a gambling method for my taste. I truly believe that smart, slow, and steady investment strategies will always result in wiser investment decisions.
By: Chad Surges