Explore Our
“Off The Wall” Blog
Unique, straight-forward, unfiltered opinion on topics of concern for individuals with newfound wealth.
On Momentum Investing and Reddit. Don’t Be a Degen.
By now, you’ve probably heard about the insanity that is the Reddit stock community, which has sent a previously destitute video game retailer into the stratosphere. There are others out there, but GameStop is the poster child at the moment.
So What?
What this level of unbridled speculation says about the state of the markets (and society, writ large, for that matter) is another topic of discussion. I have a few “degenerate” friends in GameStop currently. And as I write, another texted me to inform me he purchased a different, near-bankruptcy company, pocketing a quick 200%+ (paper) gain in the process.
To state the obvious: this isn’t a good sign for short-term market sentiment. Jared Dillian once noted that “the definition of a bubble is when people are making money all out of proportion to their intelligence or work ethic.” But bubbles can persist for a long time. And there are ways of staying invested and protecting yourself in times like this. Namely: having allocations to cash, bonds, and “risk-managed” strategies.
Momentum Investing and Reddit
I’ve read some out there comparing what is happening with “Reddit-linked” stocks to momentum investing. As you know, momentum is a concept we write about frequently and are big believers in.
However, it is disingenuous to equate what is happening with GameStop and the Reddit degens to sound momentum investing. For sure, there are similarities. Both rely on the concept of high prices begetting high prices. What some might call “FOMO.” And both are risky, in the broadest sense of the word.
But that’s where the similarities end. It’s like calling a raging alcoholic a wine connoisseur. Both might dabble in pinot noir’s, but one is pairing popular vintages with four-course meals, while the other is pounding Two-Buck Chuck en route to perpetually red teeth and puke stains in the sheets.
Said more politely, there is a big difference between sound momentum investing and unadulterated speculation. The difference is big enough to drive a truck through.
- Momentum has entry rules. Unadulterated speculation does not.
- Momentum has position sizing and targeted investment selection. Unadulterated speculation does not.
- Momentum has a sell discipline. Unadulterated speculation does not.
More fundamentally, momentum is a tool used to achieve a financial goal. Unadulterated speculation is just that…unadulterated speculation. Ultimately, momentum is a method to help avoid losers. And because equity investing is a long-term, right-tail game, we use it to try to cut off the left-tails.
Our call to action is this: don’t be a degen. And if you are, be smart about it. Don’t risk what you have and need for something you don’t have and don’t need.
Keep looking forward,
Erin
Erin M. Hay, CFA
Private Wealth Advisor, Portfolio Manager
A graduate of the University of Oklahoma, Erin began his investment management career with J.P. Morgan Private Bank. There, he worked with portfolio managers, traders and asset class specialists to bring tailored investment solutions to his team’s high net worth clients. However, intellectual curiosity would dictate both a change in geography and job description.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Capital Management, LLC [“Monument”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. No amount of prior experience or success should be construed that a certain level of results or satisfaction will be achieved if Monument is engaged, or continues to be engaged, to provide investment advisory services. Monument is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.
A copy of the Monument’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.monumentwealthmanagement.com/disclosures. Please Note: Monument does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Monument’s website or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your Monument account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Monument accounts; and, (3) a description of each comparative benchmark/index is available upon request.
Please Remember: If you are a Monument client, please contact Monument, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.