"Relative strength" or "momentum" investing -- buying shares that have outperformed the market in the recent past -- has gained in popularity in recent years, not least thanks to the theories developed in James O'Shaughnessy's What Works On Wall Street. Indeed, we run our own Relative Strength portfolio in the Foolish Workshop.
But is there any logical basis for the apparent success of such strategies? Are relative strength investors in fact just following the herd, and thereby setting themselves up for ruin in the next South Sea Tulips Of 1929 episode? And doesn't it make more sense to buy stocks when they're cheap, not when they've already become expensive?
Nigel Roberts (TMFNigel) argues that relative strength strategies take good advantage of the way the market works; Alan Oscroft (TMFAlan) thinks they have no basis in the real world of company fundamentals and are little better than reading tea leaves.
What do you think? Read the arguments below carefully, and then cast your vote and give us your feedback on the Duelling Fools discussion board.
The Bull Case
"All fundamental measures have to be related to the share price at one specific point in time. Not only that, but the companies whose shares have outperformed the market more often than not are the companies with the strongest fundamental stories. Relative strength consistently brings to light companies with superior fundamentals" more
The Bear Case
"So the crowds are right and should always be followed, eh? What is it that most people, who when first exposed to the idea of investing in the stock market, are conditioned to think of? Yes, it's 1929. Or the South Sea Bubble. Or any other craze that eventually went wrong. "The Stock Market?" they'll cry, incredulously, "What about all those fortunes that were lost in the crashes of the 20th century?". And they're right to worry about such potential catastrophe." more
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