The Psychology of Investing: Value vs. Momentum
Investing isn’t just a numbers game — it’s a psychological endurance sport. Your returns are shaped not only by strategy, but by how you handle fear, doubt, FOMO, and uncertainty when markets move against you. In this article, we explore the two most common investing styles — value and momentum — and the very different emotional demands they place on investors.
This content has been produced by Kvarn Investment Services Oy, a licensed investment firm supervised by the Finnish Financial Supervisory Authority. The content is intended for informational purposes only and should not be interpreted as investment advice or recommendation. All investing involves risks, and past performance is not a guarantee of future returns.
Momentum vs. Value Investing
Investing is often perceived as an obscure numbers game where success is driven by the ability to tolerate mathematics and boredom. In reality, it is primarily a psychological endurance sport.
Investing offers a concrete opportunity to influence your financial future, which can be exhilarating. However, negative portfolio performance can trigger powerful emotional reactions, especially if you haven't prepared for "worst-case scenarios". The psychological challenges an individual investor faces depend largely on their chosen investment style.
The two most popular styles—value Investing and momentum Investing—offer very different emotional experiences and demand different things from your psyche.
Know Thyself
Before examining these styles, it is worth noting a common pitfall: The "No Style" Trap.
The most difficult psychological situation is when an investor hasn't chosen a style at all. They don't know if they are hunting for undervalued "bargains" or riding "high-momentum" winners. This ambiguity can make everything look attractive, triggering constant FOMO: falling stocks look like bargains, and rising stocks look like exciting opportunities. Conversely, it can make everything look too scary to invest in: falling stocks look too risky, and rising stocks look too expensive.
Entering the market without a chosen style is like going to the grocery store without a list. You might get lucky, but there is a high risk you'll return with impulsive purchases while forgetting the essentials.
The Core Message: It is more important to make some choice regarding your style than to find the "perfect" one immediately. A chosen principle guides your actions; as you become familiar with it, you can evaluate its fit and adjust.
1. Value Investing: The Lone Wolf, The Patient Hunter
Value investing is a style where the investor seeks stocks whose market price has fallen below their intrinsic value. The goal is to find companies "on sale"—firms with strong balance sheets and healthy operations that are currently out of favor with the market. The investor trusts that the market will eventually recognize its mispricing and the price will rise to match its true value.
This requires long-term vision and a "margin of safety" to endure market volatility while waiting for a valuation correction. Unlike a momentum investor, a value investor dares to swim against the current and buy when others are selling in fear.
A classic example of a successful value turnaround is Advanced Micro Devices (AMD). For years, the company underperformed indices and was written off by many, only to become a massive success story once its turnaround took hold.
How to make Value Investing easier?
- Trust the Fundamentals: Developing a deep understanding of a company’s core financials and the drivers behind its stock price provides the "mental spine" needed to stay calm when the market value of your holding drops.
- Diversification: By sourcing value opportunities across different asset classes, geographical regions, and business sectors, you dilute the impact of any single "value trap" or individual failure.
- Confidence through Experience: Because value investing often requires going against the grain of consensus opinion, it demands ironclad confidence in your own analysis. This self-assurance is best cultivated through accumulated experience and a track record of past successes.
What is psychologically difficult?
- Leap of faith: Value investing requires stepping in at a moment when others see no value. Stocks are usually cheap for a reason: the news is bad, everyone is selling, and the chart is pointing southeast.
- Social Isolation: It’s hard to sit on your holdings while others make "easy money" in a bull market.
- Self-Doubt: The fear of whether a falling stock is a "bargain" or just on its way to zero.
Intel (INTC) is a prime example of a company that has caused gray hair for some value investors in recent years (though this might be changing right now).
2. Momentum Investing: Surfing the Crest of the Wave
A momentum investor doesn’t care if a stock is "cheap." Instead, this style is built on the premise that an established trend—whether upward or downward—is likely to persist. In short: "winners keep winning."
Rather than hunting for undervalued gems, the investor buys assets already in a strong uptrend, propelled by market psychology. However, this strategy demands rigorous discipline and flexibility to exit the market as the trend reverses and the momentum stalls.
What does it require?
Momentum demands discipline and speed. It is not a "buy and forget" strategy; it requires constant market monitoring and the humility to recognize the moment the trend breaks.
What makes it difficult?
The primary obstacle is the "fear of heights." The momentum mantra is "buy high, sell higher." It can be psychologically grueling to buy a stock that has already rallied 50% or 100%, as the investor must overcome the feeling that they have "missed the boat."
For example, the "rocket ship" NVIDIA (NVDA) has appeared overvalued to many since its first 100% gain. Yet, those who bought after moves of 100%, 200%, or even 400% have still seen their investments multiply.
3. Why Momentum is Psychologically Easier
While both styles have their hurdles, we believe momentum investing is more intuitive for most. There are clear psychological reasons for this:
- Confirmation Bias: When you buy a rising stock, the market gives you immediate positive feedback. The rising price validates your position. A value investor may wait years for that same validation.
- The Herd Instinct: Humans are social animals. It is far less stressful to own a stock that everyone else is praising. Social pressure supports the momentum investor, whereas the value investor is constantly forced to defend their position.
- Clarity: The value investor lives in a world of ambiguity, waiting for the market to realize its mistake. The momentum investor seeks to align with the market consensus. The metric for success is objective: is the price trending upward?
- Stop-Loss Logic: Momentum strategies typically include a hard rule: if the trend breaks, you sell. This eliminates the "agony of hope."
4. How to Sustain a Momentum Strategy
While momentum feels more natural, it can lead to excesses and bubbles. To stay grounded:
- Rule-Based Approach: Use quantitative metrics—such as moving averages or relative strength indicators—to ensure emotions aren't driving your trades.
- Position Sizing: Momentum stocks can be volatile. Don't put all your capital in one position. Scaling into positions over time helps prevent buying exactly at a local top.
- Accept Drawdowns: Not every momentum investment will succeed. Accept that individual failures are the "price of admission" for the opportunity to ride a massive uptrend.
Summary: Choose a Style That Fits Your Personality
Value investing is swimming against the current; it requires deep-seated patience and a thick skin. Momentum investing is traveling with the crowd; it requires constant vigilance and the ability to jump off the train without giving back your gains.
If you find satisfaction in discovering what others have missed, Value is for you. If you want your investing to feel rewarding from the very first mile, Momentum may provide the psychological "tailwind" you need to stay motivated.
The information and sources presented are for illustrative purposes only. While obtained from sources deemed reliable, their accuracy cannot be guaranteed.