Fundamental Investing in a Hyperinflated Stock Market Doesn’t Make Sense

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By Jacob Maslow

I don’t mean to disrespect Warren Buffett. After all, he is one of the world’s most successful investors. We’re not just talking about success in this day and age. We’re talking about probably one of the most successful investors in the history of humanity. That is how awesome Mr. Buffett’s stock-picking skills are.

If you are lucky enough to buy stock in Berkshire Hathaway when it first debuted on Wall Street, you’d be sitting pretty right now. Even if you’ve only managed to scoop up a handful of shares like maybe twenty shares or even a hundred shares, you would be more than set at this point of time. Mr. Buffett is just extremely gifted in finding companies that are under-appreciated by the market, hanging on to them over a long period of time, and then letting them go when they have appreciated tremendously. He’s built an empire with this type of investing. This is called fundamental investing, and a lot of people swear by it.

This is all well and good, but I don’t think fundamental investing applies in a hyper-inflated stock market. The problem I have with this method of investing, given the current reality of the market, is that it’s not a good fit. You have to remember that fundamental investing is all about intrinsic value. If you are going to use strict fundamental stock-picking analysis to try to find value in the stock market, chances are you’re not going to find any stocks. Maybe you’ll get a handful, but you’ll be lucky to get more than ten.

The reason for this is that almost all stocks are priced to their gills. Why is this? Thanks to cheap stimulus money unleashed by quantitative easing programs by centrals banks ranging from Japan to the European Union to the United States, there’s just too much liquidity in the market. Not surprisingly, a lot of this money has been pumped into stocks that pass the fundamental investment test. Not surprisingly, most stocks, even bad stocks, are hyperinflated

Momentum trading is the key

The better approach would be to just use momentum trading. Momentum trading doesn’t care about the underlying fundamentals of the stock. All momentum trading pays attention to is the trading volume and general direction of the stock. Momentum traders make money off very small movements in a stock’s price. If a stock moves 2% in a given day, that’s actually a huge amount of money for a momentum trader. Keep in mind that a momentum trader trades a huge amount of money. This way, even if the stock moves 2% up or down, that can translate to a pretty fat payday for a momentum trader.

It’s all about overall market trends within a short period of time. It doesn’t really matter which stock it is as long as the stock has enough volatility, volume, and players trading it. This is the better way to trade the current hyperinflated stock market. If you’re trying to use fundamental investing, you will probably end up wasting a lot of money or waiting a long, long time.

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