Is Your Investing Style Not Working

Growth, value, and momentum investing styles perform differently in different stock  market and consequently rotate into and out of favor with investors. Momentum investing was the hot style during the dot-com boom in 1998 and 1999. After the bubble burst in the spring of 2000, valuations tumble for stocks across the board, and as a result value investing came into the limelight. Market caps also rotate into and out of favor. Mid caps were hot in early 2001, followed by a focus on small caps in the month or two before September 11.

The biggest gains are usually to be made in the style or cap that is currently in favor simple because money is flowing into those stocks and demand is pushing the prices higher. It stands to reason that, assuming he or she does it well, an investor who can switch to the style and cap that is in favor will do better or at least make money faster than will an investor who sticks to one style and/or one market cap through thick and thin.

We have dubbed the investing style that goes along with the times styles surfing. When value investing is vogue, the style surfer is a value investor. When growth stocks dominate the market, he switches to growth investing. When momentum is the name of today’s game, she becomes a momentum investor. When large caps lead the way, the style surfer builds a large-cap portfolio. When small caps are in, he switches to small-caps stocks. The style surfer switches styles and caps to be where the greatest action is, and by doing so increases her potential for rewards while decreasing the time it takes for the rewards to materialize.

It sounds like the best possible style, doesn’t it? But we should point out that style surfing is probably the most demanding and sophisticated of all styles. First of all, you need to be a psychologically inclined toward what is, is a sense, no style at all, and at the same time you need to be good at growth, value, and momentum investing – and have no real preference about market-cap size. You need an enormous amount of investing confidence because you have to be sure of your judgment in three different investing styles. This type of investing also takes an enormous amount of time. Not only do you have to spend time on the current style, building and maintaining your portfolio; you have to stay on top of the market and spend time learning which investing all the indicators to which market cap are in favor and watching all the indicators to make sure you can switch nimbly to the up-and-coming style or cap before the old one peaks.

The advantage to style surfing, if you have the time and smarts for it, is that your reward is likely to be higher because of the immediacy of the returns. Risk is also higher because you are unlikely to be equally good at all the styles and you need to be right about “where the action is”.

Less patience is required for style surfing than for, say, pure growth or pure value investing, because if growth stocks or value stocks are the market favorites, the time horizon for reaping rewards should be greatly shortened. And for a style like momentum investing that normally has a short time span form buy to sell, the style surfer can make impressive gains.