The Momentum Generation

Other than ‘VAR Review’ is there a more depressing phrase in the football calendar than ‘International Break’? For the last two weeks the excitement of the Premier League was replaced with the drudgery of watching the national team*. One consolation however, is it at least gives us a little more time to sort out our fantasy football team.

I am in our family and friends league, and I can tell you there is no greater pleasure in life as a parent than beating your son at fantasy football. Every year he throws down the gantlet, and promises to right the wrongs of previous seasons. Every year experience triumphs. He never learns, but it’s fun watching him try.

The funny thing is, he knows far more than me about current player stats, he watches more games and has his finger firmly on the pulse of news coming through social media on all things transfer or injury related. He has an obvious information advantage, so how do I beat him?

Some might call it luck, I like to call it, well luck I guess, but perhaps there is more to it.

My old boss used to say, there are three ways to value and trade a market. Fundamentals, technicals and sentiment.

My son is a classic momentum trader, he identifies players who have just had a high scoring week and buys them for his team the next week. A momentum investor seeks to understand market sentiment and investor emotions to anticipate potential market movements. This strategy is akin to a surfer looking to catch the best wave and then ride it until it runs out of momentum. Timing can be difficult but at times this can be a very successful strategy.

Case in point is the US stock market this year. The “Magnificent Seven” tech stocks — Apple, Alphabet, Microsoft, Amazon, Meta, Tesla, and Nvidia have gained 71% this year while the other 493 stocks have added gained a mere 6%. These seven stocks now make up 29% of the S&P 500’s market cap. The Five Horizons and Five Horizons Wealth Management are trading names of P1 Investment Services Limited, which is authorised and regulated by the Financial Conduct Authority under Firm Reference Number 752005 index has never been this top-heavy. Sentiment has been firmly in the driving seat this year. I am not sure if this is bubble territory as yet, but they are looking pretty darn expensive.

When it comes to selecting my fantasy football team, I generally prefer a fundamental analysis approach – find players who look undervalued and have the potential to perform well in the future. Fundamental investing is based on the analysis of an asset to determine its intrinsic value, to identify those which are undervalued or have strong growth potential. This approach to investing often requires patience, as unless other investors also believe these assets are attractive you can spend a long time not making any money (and grumbling about it). Successful investing ultimately require enough people agreeing with your current view in the future. As John Maynard Keynes said “The market can stay irrational longer than you can stay solvent.”

The third approach is technical analysis. This relies on using historical price and volume data to identify trends and patterns. Technical analysts use charts, trend lines, and technical indicators to make predictions about future price movements. It’s a bit of a dark art, and can get very complicated very quickly, but it can also be a great visual way to frame your thinking. Using charts allows you to zoom out and consider a much longer time frame which can often confirm, or sometimes disprove, your investment case.

Each approach has its strengths and weaknesses, and in reality we consider a wide variety of factors. For example, our portfolios are currently positioned away from US equities and are overweight emerging markets, infrastructure and commodities. This is based on sentiment (everyone hates infrastructure and alternative energy right now), fundamentals (cheaper stocks ex-US vs expensive US) and technicals (charts are showing gold and other commodities near to breaking out of their historic range). Financial markets are moved by a mixture of rational and irrational behavior, and we strive to understand and navigate these dynamics wisely.

Whether it is fantasy football, investing, or life in general, having experience and a pragmatic approach helps. You can have all the information and resources in the world, but if you don’t have streamlined decision making process or flexibility to change course quickly you will underperform.
…And some luck helps too!

*Life Hack – My recommendation is to just watch England in major tournaments. Don’t watch qualifier games. Definitely don’t watch friendlies. Tournaments will of course end in heartbreak, but at least its more exciting.

Ps. The title for this piece comes from a documentary film of the same name, about a group of friends who form a surfing community in Hawaii in the 90’s, and take professional surfing to new heights. It well worth checking out.


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