A 1,000% return in 10 months!
For most investors, that’s a lifetime of gains.
But for shareholders of electric vehicle company Tesla, it was par for the course.
From the lows of March 2020 to the beginning of January 2021, that’s how high its stock rose.
But here’s the problem: Nothing in the underlying business changed to justify an 11X rise in the stock.
Even the most bullish Tesla analysts tried and failed to come up with good reasons for the stock’s sharp run-up.
So, why did it take off like a moonshot?
Because of momentum traders.
Now, momentum trading can be fun. And it will make you look like the next Warren Buffett at first.
But when that momentum stops, it’s really painful. That’s what happened recently with Tesla.
Following its peak, the stock price dropped as low as $563 per share over the next two months — a decline of 36%!
So, if you bought near the high and weren’t on the momentum train at the right time, you would’ve lost a quick 36%.
And again, there was nothing that changed in Tesla’s business to justify the loss of more than one-third of its value in only two months. The reason for the decline was simply that momentum traders were heading for the exits to buy other stocks that were rising.
This is a cycle that repeats itself over and over. That’s why trading based on momentum is a hard way to make money.
Instead, there’s an easier way to consistently make money in the market and sleep better at night…
Momentum vs. Value Investors
There are basically two general camps when it comes to investing: momentum trading and value investing.
Momentum trading involves buying stocks that are moving higher — or have momentum — and selling when they start heading lower or “lose” momentum.
The problem with following momentum is that you’re only focusing on price trends. You need to buy high with the hope of selling higher. That works well in bull markets.
But when the trend stops heading higher … look out below. Because when the party stops, traders all run for the exits at the same time.
This creates the quick, sharp downturns that make you give back a good portion of any gains you may have made. And it’s a pretty hard way to make money if you don’t know what you’re doing.
You’re trying to guess the price of the stock by predicting the future behavior of others. And you not only have to be right on your timing, you also have to be quick to get in and out of a trade. There aren’t many people I know who can make it work.
In a nutshell, momentum trading for a novice is nothing more than following the crowd — which, at best, gets you mediocre returns.
But you can’t grow your portfolio with mediocre gains. And that’s why it doesn’t interest me.
(Fellow American Investor Today writer Chad Shoop is a rare exception of a trader whose time-tested strategy does deliver consistent gains. Chad has a solid approach that’s easy to understand. It works and he sticks to it.)
But for consistent, long-term investments, you have to focus on the underlying value of the business. Because that’s what will ultimately drive prices higher…
The More You Know, the Better the Value
Figuring out the underlying worth of a business based on the present is a much easier thing to do than figuring out mob psychology and future prices.
If we understand the business, we can estimate its worth. And then, we can see if the stock price is trading below that valuation. That’s all we need to figure out.
It’s that simple: If the business does well and its value goes up, so will the stock price. Over the long term, this is how the real money is made.
This is why my team and I spend so much time researching each business as part of the profit opportunities we share with you.
The more time we spend sharing insights about the company — how it’s doing, what’s driving it and any changes that might impact the business — the more confidence you’ll have.
You won’t sell it when the stock price wiggles and jiggles over the short term like we’ve seen lately.
Now, I’ve recently spent a lot of time researching one business in particular. It’s transforming the health care space and could ultimately save millions of lives. And it’s part of a huge mega trend with multiple tailwinds that are so strong, they can’t be derailed.
You’ll want to get in on the massive value of this company right away, before its stock soars. So, I’ve put all the details on it together in a special report that I just released last week.
And remember, this is just one of many companies that I’ve done a deep dive on. You can expect more opportunities to consistently profit in the months ahead, too.
Founder, Alpha Investor