“Fear, greed, overconfidence and confirmation bias can lead investors to pile into winning areas of the market after they’ve risen... or pile out after they’ve fallen.”
Everyone has heard the expression “Buy low, sell high”.
In other words you look for investments that seem cheap, undervalued, or heading down, hoping that they’ll go up again, like this:
Intuitively, it makes perfect sense. Buy something when it’s cheap, and then wait for the price to rise again.
But it’s not the only way of making money in the markets. And my experience tells me that it’s not the most effective way, either.
The basis of my system is known as momentum or trend investing. It starts from a different premise entirely.
Instead of looking for investments that have fallen in price, trend investors like me get excited about prices that are rising.
Why? Because, thanks to what’s known as the ‘momentum effect’, it’s likely that any market trend – whether up or down - will keep heading in the same direction.
Rising prices tend to keep rising, and falling prices tend to keep falling.
So a trend investor is on the lookout for investments like this:
For many people this is counter-intuitive. If a share has hit a new high, most people think it will go back down again – and they’re reluctant to invest at that point.
But a lot of times, they should. A new high is a very positive sign.
You buy into a rising trend, and hold on as long as the price keeps rising.
Why does this work? Essentially because of the herd behaviour of investors. In the words of wealth manager Ben Carlson:
“Fear, greed, overconfidence and confirmation bias can lead investors to pile into winning areas of the market after they’ve risen... or pile out after they’ve fallen.”
By using a trend investing strategy, you can take advantage of the market’s herd behaviour - and make more money.
There’s plenty of formal research that bears this out. One paper in the Journal of Portfolio Management states unequivocally:
“The existence of momentum is a well-established historical fact”.
In the words of the Boy Wonder, Jesse Livermore, himself:
“It takes continuous buying to make a stock keep going up. As long as it does so with only small and natural reactions from time to time, then it is a buy.”
Or as famous trader Richard Dennis said in the 1980s:
“Markets in motion tend to stay in motion.”
And here’s John Stepek, editor of MoneyWeek magazine, who’s evaluated innumerable investment methods over the years:
“Chasing momentum is such a successful investment strategy.”
On top of this, our direct experience (and profits) over the past seventeen years has confirmed to us - and to other investors who use our Saltydog system – the huge benefits of trend investing.
Of course the momentum effect doesn’t work on every single occasion, and it doesn’t continue indefinitely. At some point every upward trend will flatten off or start heading downwards.
But it certainly happens often enough to make trend investing a great method for catching upward movements, and also – just as important - for getting out when the market starts to turn down.
