Shoot First, Ask Questions Later

It’s probably bit unfair, but at its very core, the thought process that drives momentum is to first shoot, asking questions about the why’s and why not’s come much later.

In my momentum portfolio, I picked up stocks like Graphite / HEG / Rain among others not at the bottom of their cycle but well after they had emerged from their hives. But in doing so, I also picked up companies that didn’t do well and companies that now seem or rather is told to be fraud like Vakrangee.

A question I have been trying to ask myself is whether there was any probability that I could have missed Vakrangee and the answer has been the same – No way. No based on momentum, the quality of momentum or even a cursory look at the financials.

What will save me though is that its allocation is low (1 out of 30 stocks) and fact that I got onto it much earlier (even post the fall, I am still up 50% on the stock). Someone who started his PF say a month ago may not be so lucky, but I would assume that since he would have not punted a big part of his PF on Momentum (as % of his Liquid Networth), he despite the bloodbath we may see going forward will and can absorb the hit.

Those in the world of value investing wouldn’t fall for stocks like Vakrangee (since on most of their parameters it would be obscenely overvalued, not to speak of other things) but would get caught in stocks that on appear to be superior businesses and yet market either doesn’t recognize the same or worse.

The risk of a concentrated portfolio is similar for both a Momentum Investor and a Value Investor. The only advantage for the Momentum Investor would lie in the fact that he knowing nothing about the company could exit a stock well before the rats start to abandon the ship. A investor who believes he knows a lot about the company on the other hand will spend his time accumulating the stock even as it goes down.

The biggest advantage there is for the momentum investor is that he can get out fast for he knows nothing about the company that should make him stick. Then again, as I am experiencing currently in Vakrangee, the bias of seeing profits made me sit tight when I should have been the first to abandon ship (a secondary reason is that my system is monthly rotation and the feel is not to do anything intra-month as far as possible).

For me, the biggest learning lesson from stocks like Vakrangee (if they continue to fall) is that not every stock will go through a phase of accumulation – mark-up – distribution. It can also easily be a blow-off top pattern where exit has to made without waiting for the systems to catch up.

Discretion of that kind opens its own pandora’s box. Then again, if answers were easy, why would making money in markets be so hard.