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Momentum Investors: Forever Blowing Bubbles?

Top 5 of the Week of April 4

This week in our Top 5: Peter Hodson, CEO of 5i Research Inc, has the inside skinny on 5 techniques to choose winning stocks. Chris Dieterich, from Barron’s, takes a look at an argument about momentum investing from two academics, Dimitri Vayanos and senior fellow Paul Woolley, both from the London School of Economics. And Allan Roth, a blogger for AARP offers his side of the debate on whether to own international stocks or not.

Read what Wesley Gray, CEO and CIO of Alpha Architect, has to say about the influence parents have on the way their children will grow up and invest. And Joshua M Brown, of The Reformed Broker, tells us how bull markets depress us and why we’re being schmucks about it…

5 Basic Rules to Great Stock Picking

  • Price to Earnings: Use the P/E ratio but check out all the other details too
  • Price to Cash Flow: Cash flow metrics can’t be cheated like earnings can—look at these first
  • Price/Earnings Momentum: Momentum can be great on the way up but can turn dramatically, invest carefully and keep an eye on them
  • Price to Book: While value investors—including Warren Buffett—see this as a crucial metric, it is difficult at times to measure its validity
  • Technical Indicators: Analyze the fundamentals first, then judge by these; too many to navigate well otherwise

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Momentum Investors: Forever Blowing Bubbles?

  • The argument is momentum investing produces more ‘bubbles’—foamy instances that rise quickly, but any money involved disappears into thin air when they burst
  • Sudden demand for stocks inflates prices way above the actual worth, leading to volatile fluctuations i.e. bubbles and crashes
  • The two reasons behind this are a) “benchmarking pressures” which cause investors to buy up risky equities and b) the circular effects of these performance-chasers; momentum investors and benchmark-trackers going round and round after each other in this method till the stock bubble bursts

Tell us your thoughts; do you disagree with this argument? Are you a momentum investor? Share your comments and experiences in the section below.

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Just How Global Should We Go?

  • John C. Bogle (Vanguard founder) states that investing in the S&P 500 stock index (through an index fund) is enough international stock coverage for your portfolio
  • If we compare an international equity fund to a US equity fund at Vanguard; the performance difference (a gain of 186% versus a mere 85% from 2003 to 2007) demonstrates otherwise
  • Don’t limit your portfolio diversification to your home country; commit to investing internationally and hold fast for greater returns

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Don’t Invest As We Do, Kids!

  • Though we’d like to think the next generation will learn from the previous ones’ mistakes; it turns out children follow the same risk-taking investment patterns as their parents
  • A 34% higher probability that children will invest if their parents are investors too
  • While love may be the greatest gift you can give your child, some sound investment advice might not go amiss either 🙂

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Bull Markets Don’t Make for Happy Investors

  • In ‘good times’ investors don’t look for aid from financial advisors—plus we’re quick to forget the times they helped us in crises—and those hedging or diversifying look “schmucky” for playing it safe
  • We’re unsatisfied with our personal returns; instead, we envy others’ stock performances or experience FOMO (the fear of missing out)
  • Despite our technological advances, affluent lifestyles, and a stock market that is nearly back at last year’s all-time high, we remain unfulfilled, and suffer due to our own manufactured unhappiness

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Top 5 of the Week is a summarized collection of financial investment articles that we like and think you might like too. Having written thousands of pages of equity strategy and company research between us, we understand the allure of the ever-changing world of finance. Investing is an art form – and like everything, something you can work on and improve at. There are some excellent writers out there on the finance web, some offer a running commentary on today’s market, some are doing research, some have tips on how to Become a Better Investor, and some just lift the cloud of fog behind a lot of financial jargon. Each week we will keep you up to date with the top 5 articles worthy of your attention.


Anything you would like to discuss about this week’s top 5? Do you have another favorite that isn’t mentioned here? Feel free to add it below. Let’s start a discussion in the comments section!

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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article. The Babinow Team doesn’t necessarily endorse any stocks or shares mentioned in the articles or the author of such articles linked to and summarized in Top 5 of the Week and cannot guarantee the accuracy of its information.