It’s really not that hard to beat the stock market – but you do need a consistent system and plan. There are two tried and true ways to beat the stock market: Value Investing and Small Cap investing, both beat the stock market.
But there is an unusual way to beat the stock market – and nearly everyone missed it until recently. It’s better than value investing or trying to pick small caps, because it doesn’t take any special knowledge or much time to do.
Momentum investing has only been known for a few years, but it beats the market even better than value investing or small caps.
Value Investing and Small Caps Beat the Market
To be 100% clear – value and small cap investing beat the market. This has been proven time and time again. You can find dozens of books on Value Investing – and some of these books will actually give you useful information. Value investing is buying stocks that have more discernible value inside of their company than the stock market recognizes.
Warren Buffett became one of the richest people in the world by searching out under-priced stocks. Interestingly, Mr. Buffett worked directly with the father of Value investing, Benjamin Graham. He studied under Mr. Graham when he went to school – and then worked for Graham as an analyst for several years. He had training from the best.
Mr. Buffett also has the patience of a saint. Not all of his investments work out immediately – or at all.
For example, Berkshire Hathaway is showing losses in the billions on some of its investments. You need nerves of steel – and deep pockets –to be a value investor. Warren Buffet has the financial resources to suffer through years of horrible returns before the value of a company begins to show through.
Small cap investing beats the market too. Peter Lynch is famous for picking attractive small caps stocks which then became large companies. Investing in small caps requires even more work than value investing. I’d only recommend small caps for people who are complete stock market maniacs and like to spend their free time pouring over financial information.
Investing in small caps is also risky. Small caps are notorious for being volatile. Not every one of these companies goes from a few million in sales to billions.And small caps also seem to be tied to the fortunes of the broader stock market.
These methods do beat the stock market. But they both take a bunch of research, diligence, and ?nerves of steel to make it all work.
Momentum Investing
Here’s why some people find momentum investing so attractive – it’s very easy to do. Yes, the returns are great and the risk is low – but the real benefit is how little it takes to find attractive investments. Momentum investing chooses the best performing stocks in the last several months. These stocks are very likely to perform well in the near term future too. You don’t need to know a bunch about Balance Sheets, or how to spot under-priced stocks to be a momentum investor. You just need to spot stocks (We use ETFs -Exchange Traded Funds) that have gone up strongly.
How to Choose Momentum Plays
All you need to do is scan the markets for stocks that are already going up strongly. If you are doing momentum investing yourself, try choosing ETFs with the best ?returns over the last 3 months. This time window has been useful in the past. Momentum investing tends to work better when you use two screens. For example,? look for stocks that went up strongly in the last 3 months, and went up in the last 30 days too.
If you want to try yourself, look at this momentum screen over at FinViz. Our EZ ETF system is much, much easier than screening stocks over at FinViz. All it requires is for you to enter your account value and press a button. It tells you? exactly how many shares to buy of each ETF.
Cut Risk to Raise Returns
There is something you need to know about momentum investing. Momentum investing is a not a buy and hold strategy. You can’t just blindly buy a stock that is going up today and hold onto it for years. With momentum investing, you’ll need to rework your portfolio once a month. The good thing is it doesn’t take long if you do it right. 15 minutes a month to get great long-term returns is worth it for some people, but for other people (aka “lazy-people”), it’s more than they want to do. In that case, consider autotrading. That’s an option too.
But while actively making your trades for that 15 minutes a month is some work, switching ETFs once a month has big benefits. Instead of holding ?on to losing investments, momentum investing gets out of bad trades before they ?can really take money from your account. Momentum investing cuts losses well before they get out of hand.
There is another way to cut risk too. The EZ ETF momentum system uses some rocket science math to figure out exactly how many shares to buy. The EZ ETF system takes into account the volatility of different ETFs to give you the proper amount of shares to buy. The returns of momentum investing are pretty good too. Here’s a chart of the EZ ETF momentum system since 2007 against the S&P 500.
Even with the nice gains in the stock market over the last few months, the EZ ETF momentum system is comfortably outperforming the S&P 500.
Every active investing system requires a bit of work, and any investing at all involves significant risk. Using momentum trading can make that work and risk pay off with more money in your account.
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Michael Sankowski spends a lot of his time applying quantitative mathematics to financial markets. When he's not playing the guitar, he has been a professional trader for 20 years. He's traded billions of dollars on four continents and is a well-known financial writer. He's a CFA, CAIA, and has created patented Futures products. He's here to help you make more money (and especially not lose your money).
Mike, I have read your info EZ etf’s , how do you play the etf’s in the middle of a month if you are long and the market is getting hit. Thank You, Paul Yoquelet
Hi Paul,
I am considering going to cash on Monday for the two non-performing ETFs in the portfolio. This is always an option with the EZ ETF system.
Right now the market is getting hit badly. The EZ ETF system is outperforming the S&P by about 4% this month in May. The EZ ETF system is down 4% this month while the S&P 500 is down 8%.
Nothing is a guaranteed 100% make money every day system. The EZ ETF system is designed to limit risk first and get returns second. Sometimes, limiting risk is more important than getting returns, and being down 4% is far better than being down 8%.
Overall, the system is crushing the stock market since we started April 1st. Yes, we’re down about 2.5% overall since then, but this is nothing compared to the 9.5% loss in the S%P 500.