Momentum investing can work, but if done recklessly, it can cost you a fortune

The Hidden Dangers of Investing in Momentum Stocks

Momentum investing—buying stocks that have recently been rising in price—can be an exciting and profitable strategy. However, if not approached cautiously, it can also lead to significant losses. Many retail investors get caught up in the hype, only to see their investments crash when the momentum fades. Here’s why momentum investing can be risky and some real-world examples of stocks that wiped out fortunes.

1. Buying High, Selling Low

Momentum stocks tend to be overbought, meaning their prices are inflated due to excessive demand. Investors who jump in late often buy at the peak, only to see prices plummet when the trend reverses.

✅ Example: Peloton (PTON)

• 🚀 Peak Price (Jan 2021): ~$160

• 📉 Current Price (Dec 2024): ~$7.5

• ❌ Loss: Over 95% decline from its highs

Peloton soared during the pandemic as at-home workouts became the norm. However, as the economy reopened, demand for its products collapsed, and its stock price crashed.

2. Hype vs. Fundamentals

Many momentum stocks skyrocket due to media hype, social media buzz, or short-term catalysts. However, if the underlying business fundamentals don’t support long-term growth, the stock eventually crashes.

✅ Example: Zoom Video (ZM)

• 🚀 Peak Price (Oct 2020): ~$560

• 📉 Current Price (2024): ~$60

• ❌ Loss: Nearly 90% drop

Zoom became a pandemic darling, but as businesses returned to in-office work and competition increased, its stock lost momentum.

3. The “Greater Fool” Theory

Many momentum investors rely on the idea that someone else will buy their shares at an even higher price. However, when the buying pressure slows, they are left holding the bag.

✅ Example: AMC Entertainment (AMC)

• 🚀 Peak Price (June 2021): ~$70

• 📉 Current Price (2024): ~$4

• ❌ Loss: Over 90% decline

AMC was a meme stock that surged due to retail investor enthusiasm but had no fundamental reason to sustain its high valuation.

4. Market Reversals Can Be Brutal

Momentum investing works well in a bull market, but in volatile or bear markets, trends can reverse rapidly. Many investors panic sell, worsening their losses.

✅ Example: Rivian (RIVN)

• 🚀 Peak Price (Nov 2021, IPO Week): ~$180

• 📉 Current Price (2024): ~$10

• ❌ Loss: Over 90% decline

Rivian, an electric vehicle (EV) startup, was one of the most hyped IPOs of 2021, backed by Amazon and Ford. Investors piled in, believing it would be the next Tesla. However, supply chain issues, high production costs, and increasing competition caused the stock to collapse. Those who bought at the peak saw their investment virtually wiped out.

Final Thoughts: How to Avoid the Pitfalls

• Don’t Chase the Hype: Research fundamentals before investing.

• Set Stop-Loss Orders: Protect your investments from sudden drops.

• Diversify Your Portfolio: Don’t put all your money into one momentum play.

• Recognize Exit Signals: When momentum slows, don’t wait for a collapse.

Momentum investing can work, but if done recklessly, it can cost you a fortune. Always invest with a strategy, and don’t let emotions drive your decisions! 🚨💸

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