An anonymous commenter, opined on one of my articles, “Apperantly there are more people on this site, which is suppose to be geared towards the value principles, that are interested in the daily fluctuations of the stock price rather than the underlying value of the assets. It proves my theory that even the majority of those who claim to be value investors are in fact not.” (copied in verbatim)Well, my reply to that is that there’s actually a momentum element in value investing, consistent with my agnostic belief.
Technical volatility is measured by variance/standard deviation, and synonymous with risk. A technical trader is mainly concerned with tracking the short term volatility of prices and patterns.
Fundamental volatility however tracks key financial trends such as sales, profitability, book value, range of P/E, P/Sales, P/BV or P/CF etc. Look at any 10 year key financial data, is Mr.Market in sync with Mr. Accountant? GuruFocus aptly provides this service
Read more on how the union of value and momentum may perform better in the long run:Value and Momentum Investing, Together at Last
“FUNDAMENTAL stock analysis takes you only so far. The best time to buy an undervalued stock is not when it’s simply cheap, but after it has already outperformed the market for several months.”
“But the researchers found that a strategy that simultaneously pursued value and momentum performed better over the long term than value or momentum alone. Consider three portfolios they built from domestic stocks: one pursued a pure momentum strategy, another focused only on value, and a third combined the two. The combination portfolio outperformed the momentum version by an average of 1.1 percentage points a year from February 1973 through February 2008, and beat the value version by an average of 6.4 points a year — all while incurring less risk.”
“The study makes clear that extreme value or momentum strategies incur unnecessary risk. A pure value investor is prone to buying undervalued securities that languish a long time before recovering, while a pure momentum investor may put money into overvalued securities just before their bubble bursts. So Aristotle’s maxim applies even to value and momentum investing: Seek moderation in all things.”
I will leave it to the reader to decide what works best for his/her philosophy in investing/trading.
