Momentum investing is an investing strategy that aims to capitalize on market trends. When a stock is trending up, momentum investors will buy. When a stock is trending down, momentum investors will sell.

It sounds simple and shortsighted, but studies show the strategy consistently works. Momentum stocks tend to outperform the broader stock market. So, in other words, the trend is your friend.

Once a market starts to rise or fall, it tends to keep going in that direction. It is similar to Sir Isaac Newton’s first law of motion – an object in motion stays in motion unless it’s acted upon.

You may be suspicious of momentum investing. Making decisions on the market’s latest mood swings does not sound careful. Instead, many Oxford Club Members tend to gravitate towards value investing. Which is about buying quality stocks at a reduced price. Who doesn’t like a great deal?

“Buy low, sell high” is the value investors adage. And momentum investing requires buying high. But the strategies are not mutually exclusive. In fact, the most successful investors mix strategies for greater returns. Momentum investing may require buying high, but if the prices keep rising then it is a valuable investment.

Value investing and momentum investing are both good strategies, but neither are fool proof. The best investors combine these strategies.

Now let’s take a look at an example of momentum investing.

Momentum Investors Loved Chipotle Mexican Grill

Chipotle Mexican Grill (NYSE: CMG) is a great example of a former momentum stock. It will show you what to look out for in momentum stocks.

CMG stock began to slide at the end of 2015 thanks to an E. coli breakout. Before the E. coli concerns Chipotle was trading at a high of $749 in August of 2015. After several more food poisoning outbreaks, CMG had slid all the way to $318 per share in February 2018. Obviously, that is the wrong kind of momentum for buying.

However, in the next 52 weeks CMG has recovered. Chipotle was one of the strongest publicly traded companies in 2019. With shares up over 50% at the time.

Even though the stock is down in recent months, if you were a momentum investor, you still probably would have made some gains. Event with the recent slip. CMG stock is still trading at $1,263. This is up almost 300% from the 2018 low.

Chipotle is a good example of mixing value and momentum investing. The prices were down from their pre-food-poisoning highs, which made it a value investment. And then the prices soared making it a good momentum investment.

Shares are up 2% over the last week. Any stock can have a good week, but great momentum stocks perform well over longer periods of time. CMG climbed consistently through 2021, even trading close to $2,000 at one point.

That is serious growth!

At the height of its momentum CMG was outperforming the market. It was no wonder momentum investors were bullish on Chipotle’s stock.

The Drawbacks of Momentum Investing

Momentum investing is simple in theory, but difficult in practice.

Momentum stocks can change quickly. You have to spend a lot of time in front of a screen watching the market fluctuate. The average investor is not looking to day trade. Momentum investing can be a high-turnover and high-cost strategy.

Fortunately, you can invest in momentum exchange-traded funds (ETF’s).

Nicholas Vardy, an ETF strategist of Liberty Through Wealth, recommends the iShares Edge MSCI USA Momentum Factor ETF (BTC: MTUM). The fund has outperformed the S&P 500 since its inception.

There are many other momentum ETF’s out there to choose from. Remember, the trend is your friend.