Because Momentum is Magic, That's Why.

Pay attention because I’m about to teach you one of the most important trading lessons you will ever learn, in roughly 400 words.

Last night I attended a models and bottles party at Hudson Terrace on the west side of the city, in the shadow of the Intrepid and under a shroud of rain and fog.  But inside the place was jumpin’ – the DJ played while gorgeous women and the cast of Gossip Girl shook it everywhere.

So of course, you could find me at the bar talking with my friend JC about stocks.

“What do you think of this Facebook piece of  sh*t?” JC asks me, “is there any price where its worth buying?”

“40,” I tell him. “Or 25.”

“Dude, it’s at 34 right now…”

“Exactly, but I don’t want it.  Because it’s meant to be a momentum stock but it has no momentum.  No one wants it here until they think they’re missing out on something.  Crossing over 40 makes people crazy – they say to themselves ‘wait, wait, wait, this thing is going now, it’s moving, get me in! Get Me In!'”

That’s the game, guys.  By the way, at 20 its pretty cheap based on the estimates I’ve seen – for a growth stock.

But the magic number is 40, 41, prices it hasn’t really seen before.  Because that’s when the fervor kicks in and people forget all about valuation again.  That’s where the missing out factor comes back into play and the magic happens.

And then it becomes a sprint, momentum takes over.  Sentiment shifts and psychology takes the place of analysis. “I don’t care, I have to get in, everyone else is in, GIVE TO ME THE FACEBOOK!”

Now the fundamentals guys are reading this and choking on their bagels right now, but everything I say is true, perhaps it is The Truth about markets and equity investing overall.

Multiple expansion is the result of magic.  It happens during economic tranquility and periods of political calm.  Then, paying 15 for the same earnings you once would only have paid an 11 multiple on suddenly makes sense.  Magic!

No one wants Facebook based on the fundamentals, though.  Just on the possibility of fundamentals and the promise of that those fundamentals might be and the hope that others may become more excited about these prospects than you are today.  This is greater fool stuff.  A stock without a dividend is a baseball card – you can quote me whatever price the book says but we both know its only worth what you can sell it to the next guy for.

Facebook can’t be bought until it has already been bought.  Because momentum is magic, that’s why.

Never forget this.

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