Which is better – momentum or value investing?

The theory behind momentum investing is to buy shares that are already rising. Value investing involves buying unloved shares cheaply for the long-term. So which strategy should you follow?

"The trend is your friend." That's the theory behind momentum investing, which involves buying shares that are already rising. The strategy has paid off recently, with an average capital gain of around 60% over the last three years against just 12.4% for the FTSE 100. It's also thrashed other well-known strategies, such as buying stocks that look cheap based on fundamentals (down 4%), or seeking out those with high dividend yields (down 8.5%), according to Digitallook.com's Richard Leader. So can it continue?

Momentum investing is rooted in the tendency of investors to act in herds, all piling into the latest hot stock at once. This may not make much sense, but as John Maynard Keynes observed, "the market can remain irrational longer than you can remain solvent". So momentum investors argue that you should follow a price trend, rather than stand in front of it. One of the best-known systems for identifying momentum stocks is William O'Neal's 'CANSLIM' technique, outlined in his 1988 book,

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Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.