Momentum – Friend or Enemy?
You can’t time the market
On Wall Street, a common saying is “you can’t time the market” and last week was a harsh reminder of that for those of us who own ViacomCBS (VIAC) stock. We saw firsthand how momentum can take our stock from rising more and more, to seeing our stock fall back to Earth in just a couple of days. But momentum isn’t a phenomenon limited to a few stocks. Momentum can turn any stock’s price trajectory quickly from up to down. And, a change in momentum has the potential to turn a money-making stock from a hero to a horror story in the blink of an eye.
One of the lessons we can learn from VIAC’s plight is to avoid recency bias. This is a cognitive tendency for us humans to focus on what has recently been happening while paying little (or no) attention to what might happen that could radically change the path of our situation. Yes, it feels great when your stock is on fire and it keeps going up seemingly forever. For example, when VIAC ran from around $36 a share at the beginning of this year to over $100 a week ago. Then, it suddenly fell out of favor and a tsunami of bad press brought the stock down more than 27%. It lost over half of its value in one short week.
Long term investing
For VIAC, a confluence of several negative factors is to blame for the pummeling. One of them being the forced liquidation of large blocks of the stock owned by a large hedge fund that failed, and the other a series of downgrades mostly due to the lofty valuation the stock had achieved earlier in the week. For us long-term investors, this lesson burned, but it didn’t deter us. If you do your research and find a stock that fits your plan, your risk tolerance, and your financial goals, a short-term price drop can feel like a punch in the gut But, in the long run, it doesn’t change your reasoning for why you purchased the stock. In the case of VIAC, the fundamentals didn’t change, but the momentum sure did.
Now, if the Reddit traders notice this huge price drop, we may see the stock turn quickly back toward upward momentum. But I wouldn’t count on that.
As a certified financial planner, Crystal can help you navigate these changes. Contact us for more information.