Stocks on the long-term trade based on fundamentals. Fundamentals are defined as the cash flow the position provides over a longer period of time. Fundamentals are a foundation of investing and most market participants look at this closely when making investment decisions. Warren Buffett of Berkshire Hathaway [ BIR'A 26.62 -0.18 (-0.67%) ] has used this over a long period of time to provide excellent results to Berkshire Hathaway shareholders.
But it's clear that momentum cannot be ignored as it does impact the movement of asset prices.
While it is dangerous (and not appropriate for most investors) to look solely at momentum as a trading trigger, we do believe it is important to recognize how sentiment effects the price of assets.
It's also important to recognize that assets that have strong fundamentals on the long-term often trade irrationally on a momentum basis. It's why a company that slightly misses earnings (but with great future business prospects) might trade down significantly so because of short-term momentum. Short-term price movements are driven by traders with shorter-term time horizons (often less than a year), and this can cause noise in the price of shares and in the value of assets in the marketplace.
China is a perfect example of sentiment versus fundamentals.Page 1 of 3 | Next Page