Riding the Momentum: Necessary but Dangerous?

I recently came across the phrase “ride the bubble”, and looking at the markets today, it feels very true, especially in the US markets where indexes just hit new time highs after highs.  Prices often move not just because of fundamentals, sometimes, just because of sheer momentum.  Bubbles seemingly form when investors chase higher and higher valuations, and those who dare to ride them can make outsized gains.  To me, as someone who knows little about valuations, there is a blur boundary between chasing the bubble or chasing the momentum.  But often, bubbles are formed when momentum runs are stretched, and the point in time when one exits the market differentiates momentum chasers from bubble riders.

For me though, I believe I am more of a momentum chaser (if I ever succeed), and less so of a bubble rider.  This is because it has always been a struggle for me to ride through the momentum and I will often panic when the prices rocket exponentially instead of enjoying the ride.  History has shown that whenever I noticed any shares with upward momentum, I will doubt it, but as time progresses, I will end up "FOMO" in.  However the time I buy usually coincides with the end stage of the momentum run/ bubble territory and soon after I became either a bag-holder or end up with losses.  As such, since 2018, I steered myself from momentum trading.  Therefore nowadays, as a self-proclaimed conservative dividend investor who places dividends first, I often find myself staying on the sidelines.  Even with these painful experiences and caution in mind, many times, I watch certain stocks run up and the greed in me would wonder if I am missing out.  That is the trade-off: safety brings stability, but sometimes it means watching others enjoy the ride while I hold back.

George Soros once said, “When I see a bubble forming, I rush in to buy it”.  It sounds almost reckless to myself, but it reflects a reality: bubbles are part of the market cycle.  They are dangerous, but also unavoidable.  The question is not whether bubbles will come, but how we respond to them.

Real-Life Examples: When I Sat It Out

Here are some recent cases in Singapore where I saw share prices run up, sometimes dramatically, in companies I did not really understand deeply and I held back, even though I was notified of these stocks by some fellow investors in the early stages.  These stocks may not hit "bubble territories" yet, but the sheer momentum in these stocks have been unstoppable.

1)     Hong Leong Asia: Over the past year, price has risen from SGD 0.82 to SGD 2.45, an approximate 300% increase.  Although I am confident in the "Hong Leong" brand, I was quite clueless in their business, and their involvement in the China market made me held back.  Therefore it became a missed opportunity.  

2)     Oiltek: Over the past year, there was a bonus issue of 2 new shares for every 1 existing share owned.  Combined this with the run up in share price from SGD 0.485 to SGD 1.05, the total returns is about 650%.  I was quite clueless about their business, so I skipped.

3)     LHN: Over the past year, price has risen from SGD 0.36 to SGD 1.02, an approximate 280% increase.  I was clueless about their business, so I skipped this too.

In each case, I saw momentum and heard bullish voices, but my lack of deep familiarity with the businesses (risks, cost structure, dependency on external factors) made me cautious and hence, I stayed away.

Real-Life Examples: When I Enjoy The Ride

Though I missed out on many stocks, I did manage to enjoy the ride for a couple of shares.

1)     Palantir:  Before I liquidate my US Portfolio, I used to invest a small sum in Palantir.  I remember my average holding cost was about USD 18, and I sold my entire stake at USD 75.  Looking back, I only rode half the wave up, as recent price was around USD 180, but all these are only on hindsight.  The lower profits probably meant that my conviction was not that strong, and I was wary of price retreat at that time.  Nonetheless, profits are always welcomed.

2)     Singapore Technologies Engineering: This past year has been a spectacular year for a blue-chip stock like STE.  I own shares of STE since 2018, and it has been hovering around SGD 3 to SGD 4 for a very long time.  However, this past year, we see the share price rose by about 100% to SGD 8.50.  As yield compression occurred, I have sold about 30% of my holdings to diversify the proceeds to other higher yielding companies.  Currently, I am still holding on the remainder shares to enjoy the dividends and any possible capital gains.  With my conviction in the company, I can continue to hold on to it for long term.

My Approach: Dividends First, Yield Always

Despite seeing these bullish runs, my strategy remains the same.  I stay invested in companies I understand, that provide reliable dividends, and I do not try to catch every fast-rising stock.  Though it seems like missing out on huge profits, but I know that if I invest monies in companies that I have low conviction in, I will get jittery and stressed, and every small dip in share price will cause unnecessary stress and panic in me, and probably causing me to sell in advance and eventually miss the huge run up.  As such, looking back, even though I missed out on huge massive capital gains, with my current strategy, I do collect income along the way, through good times and bad.

Here is the key discipline I follow: if yield compression becomes too severe where the dividend yield drops below 2.5% for a stock I own because its share price has run up so much, I will sell a portion of that stake.  Not because the company is bad, but to maintain the overall yield of my portfolio.  The proceeds from such sales go into higher-yielding shares, letting me rotate capital from over-valued or over-heated winners into steadier income plays.

The Balance Of Riding Versus Exiting

I do not chase bubbles or stock momentum recklessly, but neither do I avoid them entirely.  By staying invested, I let dividends flow through both calm waters and storms.  And if a momentum makes one of my holdings too “expensive” from an income perspective, I take that as a gift, a chance to redeploy capital into higher yielding opportunities.  However, the "noob investor" in me often prevents me to hold on to stocks to reach the full potential of the momentum due to fear, as reflected in Palantir shares.  For dividend stocks, I held on to the shares without knowing the bubbles have burst, and realization suddenly hits only after prices have retreated by a large percentage (case in point is Mapletree Industrial Trust).  

At the end of the day, I may not always catch the full ride-up.  However my dividends keep me grounded, providing steady returns whether shares soar or correct.  That, I believe, is the real reward of investing with discipline, which is riding the waves without ever losing sight of the shore.  Barista FIRE, here I come...!