Understanding Stocks

74 UNDERSTANDING STOCKS
be able to find a bigger fool who is willing to buy it from you. Momentum
investors tend to use technical analysis to look for stocks that will
make sudden and dramatic moves in a short period.
In the go-go 1990s, a surprise announcement or positive rumor
could send stocks up 20 or 30 points in one day. Although it is still possible
to find momentum stocks, it’s not as easy as it was a few years
ago. (And it’s unlikely that we’ll see that kind of market environment
again for many years to come.)
Momentum investing, although exciting and potentially profitable,
is a difficult strategy. Many momentum stocks can explode in either
direction, often costing you a lot of money. Although it’s possible to
catch some of these stocks on the upside, it is definitely not as easy as
it looks. (Perhaps you should wait for the next bull market before using
a momentum strategy.)
Contrarian Investing: Doing the Opposite of Everyone Else
Contrarians, as they call themselves, use fundamental analysis to find
high-quality companies with low P/Es that other investors have abandoned.
The more unloved the stock, the more contrarian investors like it.
When everyone else was accumulating technology stocks in the late
1990s, contrarians were buying out-of-favor companies like Waste Management
(WMI) and Red Hat (RHAT). After many technology stocks
imploded, contrarians were scooping up shares of stock in unloved companies
like Xerox (XRX).
Contrarians are especially fascinated by a company that the media
and other investors hate. However, it takes a tremendous amount of
skill and patience to find formerly high-flying stocks that will once
again outperform the market. In addition, it takes courage to buy stocks
that no one else wants.
There is also a group of contrarian traders called “investolators”
who use technical analysis, especially charts and institutional ownership,
to find stock picks. Just like contrarian investors, investolators
look for unloved companies that have hit bottom. Ted Warren coined
the term investolator in the 1930s, combining the words investor and
speculator.