A scientific definition of momentum might be “The force possessed by matter that is in motion”. The product of the mass and velocity of a body gives it its impetus and so it is with investing. The greater the money that is being invested into a fund or asset sector the quicker its value will rise and it will acquire greater impetus as it attracts other investors. Obviously the opposite applies, as a fund or sector loses investors the upward momentum ceases and it will reverse, gaining impetus in the opposite direction. It is of course possible to make financial gains as the value of the market falls by selling short using Exchange traded funds. This requires a lot of attention as ETFs can move quickly and in a volatile market it is easy to make costly mistakes. At Saltydog our Tugboat portfolio is intended to be a safe and secure investment so we do not use ETFs.
These are some of our thoughts at Saltydog on Momentum Investing.
The basic idea is that once a trend is established for a fund or asset class it is more likely to continue in that direction than to move against the trend. We believe that large increases in value will be followed by additional gains and vice versa for declining values.
The Value investor will try to buy low and is anticipating being able to sell high, whilst the Momentum trader will buy high and sell higher whilst riding the herd. He just has to avoid falling off and getting trampled.
The strategy works best in a Bull market and is least comfortable when the markets are undecided and volatile. This is the time to head for harbour and cash. If you are permanently invested in the market at all times you will need perfect foresight to protect your investments and that would be unnatural. In our book the ability and willingness to run away beats the macho strategy of always holding on. Whilst doubt is not a pleasant condition, certainty is just absurd.
A Momentum Investor needs access to constant up to date fund and sector information. Ideally this will be presented in such a way as to high light what is flavour of the moment and will have removed the dross. Knowing what was performing one, three and five years ago just does not cut the mustard- in fact it is pointless. With current performance numbers you are able to see whether the markets are confirming your beliefs which you will have got from your financial reading and other sources. At Saltydog we believe that this is the right way round to make your investments. It is sacrosanct that the numbers must confirm our beliefs before committing our money.
I have just been reading about the success of the Norwegian Sovereign Fund. Back in the seventies when North Sea Oil started to be developed the Norwegians put the revenues from the oil into the hands of an organisation made up of a bank and business men. They were tasked with building a fund that would benefit the future prosperity of all Norwegians. The British however put the oil revenues into the hands of politicians. The Norwegian Sovereign Fund now has a value of $760 billion and makes the Norwegians the wealthiest people on earth. It pays for their pensions, health and old age needs whilst lowering their taxes. The British on the other hand have none of these benefits. In contrast we have huge debts and make massive payments in benefits to anybody who holds out their hand.
Fracking has now come onto the scene and guess which nation is grabbing this latest gift from nature with both hands. Well, it is not the British. Even with all the nation`s financial problems we would rather spend £80 billion on a high speed train system than seize and concentrate our efforts on a God gifted chance to address some of our debt. Not so the Norwegians who see yet another chance to secure the financial future of their people. They have seen the effect that the benefits of fracking have had on the American economy and they want more of the same. What is it about the British thought process that makes saving and self- reliance so low on our list of priorities?
Surely we should be teaching the importance of these things in school but how will this go down with the Teaching Unions? Which of our politicians has the knowledge and understanding of compound interest to realise that it really is true “That great oaks from little acorns grow.”? The simple example of a saving plan should be compulsory learning. A person saving £1000 a year at 8% growth is worth £15600 at ten years, £49400 at twenty years, £122300 at thirty years and £279700 at forty years. This would be their retirement fund and it has been self- generated. You can be sure that the Norwegians understand this principle but what a shame that the British do not. It is the prime moving principle of the Saltydog Investor.
How is it possible to make any sense of the writings of the financial press? It is to be expected that different commentators will have different views especially when they look at the same situation but from different political and economic perspectives. It is understood that you must make allowances for all of this when you have to make up your own mind about where you might place your investments to improve your future prosperity. However what do you do when these pundits mostly agree? Do you follow their lead or do you take the opposite view?
About a year ago, when gold bullion prices were around 1900 dollars an ounce it was universally agreed that the price would continue to rise and therefore you ought to be adding more gold investments to your portfolio. It subsequently fell to 1130 dollars. More recently the financial criers declared that the value of sterling would fall relative to the US dollar. In fact it has strengthened. In a similar fashion the Japan Nikkei 250 was destined to regain its former glories as it headed up towards 20,000, but in fact it has fallen back. What are we to make of the statements from the government that the UK economy is heading back towards easy street whilst on the other hand the reverse is being stated by the BBC and the labour opposition. (By the way this is a definite case of where two Eds are not better than one)
Investors have every reason to be bewildered. Speaking for myself I am fast reaching the state where on the left hand side of my brain there is nothing right and on the right hand side there is nothing left! At the end of the day the only thing that makes sense to me is to fall back on accurate unbiased facts and numbers that are current which leaves you with a trend to follow. So – be a momentum investor and follow the Saltydog numbers. You will get a two month free trial so what do you have to lose?
The Saturday Telegraph reported on the analysis carried out by GfK a research firm that has investigated investor trends over the last five years. It said that during this period 63% of investors were taking and paying for financial advise and that this represented around about a million people. However since the introduction in January of the rules brought in by the FSA (now the FCA) to make the costs of advice more transparent, there has been a sea change in investors willingness to pay. Their research shows that people with more than £100k to invest are 20% less likely to pay for advise and people who have less than £50k are 30% less likely to pay. This apparently represents about 340000 people who are now going to be travelling down the D.I.Y. route. That is a lot of people.
This has been recognised by Brokers and Fund Supermarket platforms who are rapidly adapting their approach to assist these people to trade without the use of advise and assistance from the IFA world. However these platforms are still not giving unbiased performance information on the funds that are written up on their websites. The money they receive from the Fund Investment Industry is still unclear and is opaque to the outside onlookers eyes. The cost of using these platforms has fallen to an attractive level but will you be able to trust the investment information? Advertising will still be contributing to the profit made by these platforms and Broker houses.
Surely this is the time for an organisation such as the Saltydog Investor to become the upfront tool for some of these 340000 people who are looking for simple up to date numbers on the performance of the Unit Trust, Investment Trusts and ETFs markets. They just have to be made aware that this knowledge exists, is totally unbiased and available.