How Momentum Investing Works–A Parable

Infinite growth

A few years ago Larry approached his Guadalajara neighbours and announced that he would buy monkeys for $10 each. The neighbours, seeing that there were many monkeys around, went out to the forest and started catching them. Larry bought thousands at $10 and, as supply started to diminish, the neighbours stopped their effort. He next announced that he would now buy monkeys at $20 each. This renewed the efforts of his neighbours and they started catching monkeys again. Soon the supply diminished even further and people started going back to their farms. The offer increased to $25 each and the supply of monkeys became so scarce it was an effort to even find a monkey, let alone catch it!

Larry now announced that he would buy monkeys at $50 each! However, since he had to go into town on some business, Darren, his son, would buy on his behalf. In the absence of Larry, Darren told the neighbours: “Look at all these monkeys in the big cage that my dad has already collected. I will sell them to you at $35 and when Dad returns from the city, you can sell them to him for $50 each.” The villagers rounded up all their savings and bought all the monkeys. They never saw Larry or Darren again, only lots and lots of monkeys! Now you have a better understanding of how the stock market works.

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