How To Make Real Long-Term Investments

A 1,000% return in 10 months!

For most investors, that’s a lifetime of gains.

But for shareholders of electric vehicle company Tesla, it was par for the course.

From the lows of March 2020 to the beginning of January 2021, that’s how high its stock rose.

Chart showing Tesla's one-thousand-percent rise

But here’s the problem: Nothing in the underlying business changed to justify an 11X rise in the stock.

Even the most bullish Tesla analysts tried and failed to come up with good reasons for the stock’s sharp run-up.

So, why did it take off like a moonshot?

Because of momentum traders.

Now, momentum trading can be fun. And it will make you look like the next Warren Buffett at first.

But when that momentum stops, it’s really painful. That’s what happened recently with Tesla.

Following its peak, the stock price dropped as low as $563 per share over the next two months — a decline of 36%!

Chart showing Tesla's 36% decline.

So, if you bought near the high and weren’t on the momentum train at the right time, you would’ve lost a quick 36%.

And again, there was nothing that changed in Tesla’s business to justify the loss of more than one-third of its value in only two months. The reason for the decline was simply that momentum traders were heading for the exits to buy other stocks that were rising.

This is a cycle that repeats itself over and over. That’s why trading based on momentum is a hard way to make money.

Instead, there’s an easier way to consistently make money in the market and sleep better at night…

MOMENTUM VS. VALUE INVESTORS

There are basically two general camps when it comes to investing: momentum trading and value investing.

Momentum trading involves buying stocks that are moving higher — or have momentum — and selling when they start heading lower or “lose” momentum.

The problem with the following momentum is that you’re only focusing on price trends. You need to buy high with the hope of selling higher. That works well in bull markets.

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