Trend Following vs Value Investing - Which is better?

There are multiple approaches to stock investing and when utilised correctly (which takes great experience and knowledge), they can be profitable in the hands of an adept investor/trader. Some may ask, is trend following or value investing more profitable? Let's first deep dive into the differences.

Trend following

Trend following involves buying stocks that are currently hot trending in the market. This requires investors to identify stocks that are experiencing an upward price trend and place positions with the expectation that the trend will continue. 

The objective is to ride on the momentum and take advantage of short-term price movements. This approach is widely popular among traders and investors who prefer a more active and dynamic investment style.

One example that most Tiger friends can possible relate to will be glove stocks during the COVID-19 pandemic. Companies such as $TOP GLOVE CORPORATION BHD(BVA.SI)$ and $MEDTECS INTERNATIONAL CORP LTD(546.SI)$  experience astronomical growth in revenue and profits, with their share prices soaring and breaking all-time highs with each earnings release.

However, such trend was short-lived and fundamentals went south with the release of COVID-19 vaccines and countries transit into an endemic era. Prices for these stocks have since retreated more than 80% from their highs. Investors who rode on this trend but did not exit on time would have incurred a hefty loss on their portfolio.

Value Investing

The key objective of value investing focuses on identifying undervalued stocks that are currently trading below their intrinsic value instead of spotting short-term trends. This involves picking companies with strong fundamentals, for e.g. healthy balance sheet, strong operating cash flow, and consistent earnings growth etc.

The goal of value investing is to buy these undervalued stocks and hold them for the long term, waiting for the market to recognise their true value and eventually translating that into profits.

For example, most tech giants such as $Microsoft(MSFT)$ Bullishand $Alphabet(GOOGL)$ Bearishsaw their share prices plunged by over 20% within 1.5 months during the COVID-19 pandemic. However, most of the fundamentals were unaffected. In fact, demand for digital services and products surged during this period, fuelling higher revenue and profits. 

If a value investor took on a long-term investment perspective, a DCA during this period would have rewarded him/her handsomely as most tech stocks rebounded rapidly off the Mar 2020 lows.

Comparing both approaches…

So, which approach is better for stock investing: trend following or value investing? The answer largely depends on the individual investor's goals, risk tolerance, and investment style.

Trend following can be a profitable strategy for investors who are willing to take on higher risks and have a shorter investment horizon. However, this also implies higher volatility and greater uncertainty. Investors must actively monitor their investments and make quick decisions based on market trends.

Value investing, on the other contrary is a more conservative approach that requires patience and discipline. It is suitable for investors who are willing to hold their investments for the long term and have a lower risk tolerance. However, value investing require ls a significant amount of research and analysis to identify undervalued stocks, and investors must be prepared to weather short-term market fluctuations.

Both approaches can be successful, but investors must be aware of the risks and potential rewards associated with each approach. Always choose your approach wisely and remember to do your own due diligence. 

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