When it comes to investing strategies, the “buy low, sell high” mantra of value investors is the approach best known to those scrutinising the market for attractive potential returns. However, a closer look at the “buy high, sell higher” formula of momentum investing could result in even greater success – if you get your timing right. In the past 30 days the FTSE All Share has risen more than 6.5 percent – could that rise continue? And which stocks are riding the wave? We have highlighted six potential candidates for momentum investors. 


The Trend is Your Friend

There are several ways of identifying momentum companies but the technique typically involves investing in those stocks that have performed best in the recent past – say 12 months. It can also mean selling or shorting the poorest performing stocks. Sounds simple? Read on.

Behind the momentum theory is the observation that stocks with form for strong performance tend to keep rising whereas poor performers will continue to lag. Although analysts are divided on why this happens, there is a sense that at least some of the reasons are behavioural. Advocates argue that investors in stocks that are at, or close, to their 52-week high are naturally slow to react to positive stock-related news. Likewise, investors will typically “jump in” to stocks that are rising (which serves to fuel that rise further).

Last year, the Credit Suisse Global Investment Returns Sourcebook, which is an authority on long-run global investment returns and investment styles, concluded that, since 1900, a momentum approach to buying stocks would have outperformed strategies that focus on size and value. It found that a strategy based on buying the previous year’s top-performing shares and then holding them for six months produced an annualised real return of 14.3 percent, against the market’s 9.5 per cent average.

But detractors of momentum investing claim that a strategy underpinned by picking past performers is too simplistic. In turn, few argue that the strategy demands constant market scrutiny and adept timing because it is susceptible to volatility and can unravel quickly in bear markets. In a 2010 white paper, Tom Hancock of investment firm GMO, put the point succinctly: “It is hard for the practitioners of a momentum strategy to launch a vigorous defense while looking foolish for having recently lost money with a portfolio of…

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