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Lost Momentum

Momentum investing: Lost cause or comeback kid?

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These are difficult times for momentum investors. A horrific 2008 put the exclamation point on an awful decade, during which their style worked in only two years, really--three if they were lucky.

Momentum investing is based on the idea that people underestimate change, both for the better and for the worse. Practitioners typically buy stocks of companies that have surprised Wall Street by beating earnings and revenue estimates. It helps, too, if analysts are boosting their estimates. Advocates of "Big Mo" don't usually care much about valuation. And momentum investors are often quick on the trigger, selling at the first sign of a reversal of the pattern.

One recent sign of the growing disillusionment with momentum strategies came when Vanguard removed Turner Investment Partners as co-manager of  Vanguard Growth Equity (VGEQX). The firing came nearly 10 years after Vanguard adopted the fund from Turner. Had you invested $10,000 at the time Vanguard rebranded the fund in June 2000 and sold at the end of 2008, you'd be down to $4,217.

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Russel Kinnel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.