In early 2005, Staples introduced its “easy” button, selling nearly one million units shortly thereafter. The product’s success showcased the potential for a straightforward investment strategy: momentum investing. This strategy involves buying stocks that are rising and selling those that are falling, which has historically yielded quick gains but can be risky over the long term.
Since 2014, a strategy utilizing the Russell 3000 Index showed that the top 10% of performing stocks yielded gains of 12.3% over the next year. However, over longer periods, former losers provided better returns, averaging 13.5% compared to the 8.2% of former winners, underscoring the importance of careful stock selection for sustained profitability.
Notably, an investor who had bought Nvidia Corp. at the launch of ChatGPT in November 2022 would have seen gains of approximately 1,100%, while buying the stock a year prior would have resulted in a 50% loss. This highlights the volatility of momentum investing and the potential benefits of focusing on fundamentally strong, undervalued companies for long-term growth.
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