Last time, I introduced the concepts of Fundamentals versus Momentum focused investing. Unlike real investing though, you also have to think how your investing style will affect your value as an investment.
Next, the pros and cons of each.
Creating Momentum
You can decide you want your focus and the main benefit you provide to others to be a rising share price. This will entail actively trading stocks ensuring you are maximizing your investment in high-return shares. You will also use techniques such as swapping share purchases with others and making lots of buys to entice others to invest. There are a number of advantages to this strategy.
- Rising Share Price, More Activity and Attention
When your share price is rapidly rising, you will attract lots of attention, rapid trading and rising share price. These trades lead to lots of supporting onsite activity such as thank you shout outs and thumbs up. - Better Investment Gains
When you actively manage your portfolio, you can move your wealth to those stocks that are producing either high dividends or share price growth at that time. Focusing on momentum will tend to produce higher dividends and portfolio gains from others’ share price growth.
Focusing on momentum investing can come at a cost though.
- Bigger Time Commitment for Trades
If your focus is on your own share price, you need to be sell stocks and buy others on an active, ongoing basis. This trading style requires a significant time commitment to monitoring shares and trading. People talk about Empire Avenue being a time-sink. This is where it happens. Most people don’t have the time to constantly monitor trading. - Less Shareholder Loyalty
I want to be careful speaking for other people. However, while I have had a sense of obligation to hold stock in people that have swapped shares with me, I feel less loyalty to those people over the long run than I do with those people I consider my online friends. I think you can assume others won’t be as loyal to you if their only reason for originally buying your shares was financial gain. This is especially important for those people that sell shares to purchase stock upgrades. You can see this in the increased volatility that large share swappers face often having to endure multi-point drops in a day. - Guilt
Selling three-quarters of your portfolio for a share upgrade sucks. So, does having to sell someone that is struggling, but not making you money. Both are required if you want to ensure real momentum up.
Providing Value
You can decide you want your focus to be consistent activity and the main benefit you provide to others to be your content. If you are seeking to appeal to fundamentals (or value) investors, you would likely use more of a buy and hold strategy rather than active selling and rebuying. There are advantages to this approach.
- Save Commissions
To buy a share and later sell it, will cost you 5% each way or a tenth of the value of the stock. Multiple sell-offs for progressive share upgrades end up costing 30%, 40% or even more of your portfolio value. Buying and holding saves significant commission fees over time. - Dividends and Activity Credits
While you will have less Empire Avenue activity with a fundamentals strategy, you will produce good dividends and activity credits if you produce lots of good content. - Build General Online Presence
Focusing primarily on creating content has the added benefit of building traffic to your blog, followers on Twitter et cetera.
Of course, there are disadvantages too.
- Creative Effort
While focusing on providing value reduces the amount of active trading you have to do, it does significantly increase the amount of creative effort needed. (Says the guy who tries to post these blog entries every day.) - Less Cash
If you are going to buy and hold, you will have less cash for buying shares in good investment opportunities that come along or people that buy you.
With the different pros and cons, whether you focus on the momentum strategy of active trading or the fundamentals strategy of content creation again depends on your overall objectives.
Are you a Value or Momentum investment? Do you see your your strategy changing over time?
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