Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific stock trading advice that will help you develop a successful approach to investing. Each Investor Toolkit update gives you a fundamental tip and shows you how you can put it into practice right away.

Today’s tip: “Buying nothing but stocks that are going up in price is liable to lead to more losses than gains.”

Investors sometimes ask why we bother delving in such excruciating detail into the finances and fundamentals of stocks we recommend. Why not just buy the stocks that are going up, then place stop loss orders so we sell them when they quit rising?

This is a partial description of the momentum approach to stock market investing. You buy stocks that are rising and reporting rising earnings, or earnings gains that beat expectations. You sell when the stocks quit rising and/or when earnings growth falters.

This approach would work great if nobody else ever thought of it.

The problem is that there’s a lot of competition when you only buy the rising stocks with the surprisingly fast earnings gains—and even more competition when you sell. As a result, you miss out on much of the early part of the rise. If you get in too late, then get out at the first hint of bad news, you may wind up selling at a loss. Doing that a few times can put a deep dent in the value of your portfolio.

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Why momentum investors rarely stay on top

If you look at a list of top-performing mutual funds or investment counsellors, you’ll often find so-called ‘momentum investors’ at the top of the list for periods of one year. But it’s hard act to maintain. A year later, you’ll often see a different set of momentum investors at the top of the one- year top performers list.

Momentum investors use a number of formulas for their buy and sell decisions, but they all come down to “buy on strength and sell on weakness.” They tend to pile into the same stocks all at once so that the gains that follow are something of a self-fulfilling prophecy.

The trouble is that when a stock’s rise begins to fade, momentum investors all start getting out as a group. That causes violent fluctuations in the share price.

In contrast, if you look at a list of top performers over a period of a decade or two, the top spots usually belong to people who invest much as we do—who look at all the excruciating detail and temper it with a consistent blend of diversification and common sense.

Trying to buy stocks that are going up is a much riskier venture than it may initially seem. Momentum investing implies that you can predict what will happen to a stock’s share price, but many factors that you can’t possibly anticipate will determine how the price performs.

In effect, you are gambling on the price—and that’s a gamble many investors lose.

COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members

When a stock is rising in price, what information do you need before you make a decision on the stock? Have you made an “impulse buy” on a rising stock without looking into the fundamentals? Did that work out in your favour? Let us know what you think.