Method workshop · Growth and Momentum
Growth vs Momentum: Why Blurring Them Gets Expensive
They often own the same shares for a while. They are still different methods with different evidence, different exits and different ways of failing. Mixing the rules is how a good position becomes a bad story.
Growth investing watches the business. Momentum investing watches the price. Most of the damage I've seen in this part of the market comes from people who buy for one reason and then sell (or refuse to sell) for the other.
It sounds like a technicality. It isn't. The two methods ask completely different questions, and the answers tell you to do different things at exactly the moments that matter.
Two questions, not one
The growth investor asks: is this business getting better faster than the price assumes? Revenue acceleration, margins, reinvestment opportunities, the size of the market still in front of it. It's fundamental work, just pointed in the opposite direction to value.
The momentum investor asks something blunter. Has this share outperformed its peers over the past three to twelve months? Momentum doesn't need to know why. The academic evidence starts with Jegadeesh and Titman's 1993 paper on US shares, and Asness, Moskowitz and Pedersen later documented the effect across several countries and asset classes. That evidence is about portfolios of past winners, rebalanced on a schedule. It says nothing about whether one particular share will keep running.
So when someone says "I'm a growth and momentum investor", my first question is: which one decides the sell?
Why the sell rules can't be shared
Growth sells on the business
A growth thesis breaks when the business stops doing what the thesis needed. Two or three quarters of decelerating revenue. Margins that stop expanding. The market conversation shifting from "how big could this get" to "they already own the category". None of that shows up on a price chart first, necessarily. Sometimes the price is still rising when the evidence turns.
Momentum sells on the price
A momentum position exits when relative strength fades, on whatever rule was set before entry. A trailing level, a rank that drops out of the top group, a fixed review date. The business could be thriving. Doesn't matter. The method has said its piece.
Now watch what happens when the two get blurred. The price rolls over, and the momentum rule says go. But the holder bought "for the story", so they swap rule books and hold. Six months later the business deteriorates too, and now they want to wait for the price to "confirm". Each method gets used as an excuse to ignore the other. That's not combining methods. That's having no exit.
From the desk
I once called Nvidia a potential poster child of an AI bubble, on air, because the multiple looked impossible against history. I was wrong. The revenue caught the multiple and then some. The lesson I took wasn't "buy expensive things". It was that "it's never been this expensive" is an assumption, not a thesis, and the work has to be done before the dismissal.
The gap where the returns go back
There's a stretch of time between the growth story breaking and the investor admitting it. That gap is where a lot of growth returns are handed back. It feels like loyalty. Mostly it's anchoring to the price you remember.
A hypothetical to make it concrete. You buy a software business growing revenue at 40 per cent. The share doubles. Then growth slows to 30, then 22. The company is still excellent, and the price has only dipped 10 per cent from its high, so it feels fine. But the valuation was built for 40 per cent growth. A growth rule written at entry ("two consecutive quarters below 25 per cent triggers a full thesis review") forces the conversation. Without it, the next downgrade arrives as a surprise you had already been warned about.
The book goes deeper on peak-growth warning signs. The short version: no single sign is a sell. Three or four together usually are a review.
Momentum fails differently
Growth fails slowly, through denial. Momentum can fail fast. Daniel and Moskowitz (2016) studied "momentum crashes" and found the worst episodes in long-short momentum portfolios clustered in sharp rebounds after market panics, when beaten-down losers rallied hard. That finding is about a long-short factor portfolio. A retail investor who only holds the winners faces a related but different risk: leaders falling hardest when a crowded trade unwinds or rates move against long-duration assets, as in 2022.
Different failure, different defence. Growth needs a written thesis and the willingness to reread it. Momentum needs position sizing and a mechanical exit that you follow even when it looks stupid.
Can you combine them?
Yes, and I think the combination is where the useful edge sits: a business that is improving, with price leadership confirming it. But a combined method needs a combined exit, decided in advance. For example, a full review if either the fundamentals or the relative strength fails, and a sale if both do. Write which one wins a tie. If you can't, you are running two methods with one wallet.
A Fit Check for this one
- Can you name the single fact that would break your growth thesis?
- Do you know which price rule ends a momentum position, before you buy?
- Will you check results at least quarterly, or will reporting season slip past?
- Have you sat through a 40 per cent fall in one holding without changing your reason for owning it mid-fall?
Honest "no" answers don't rule you out. They tell you what to build first. Usually that's a smaller position size and a one-page plan.
What to do with this
Pick one growth or momentum holding (real or on a watchlist). Write one line: "I own this because ___, and I will sell when ___." If the reason is about the business and the exit is about the price, or the other way round, rewrite it until both halves use the same method.