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Hi hildy!

The "second derivative investing" concept refers to the second derivative in calculus, which is the rate of change of the rate of change of a function. It is a way of describing a pretty simple concept.

Imagine a graph of, say, a security's 10-day moving average, moving up and down. You can look at whether the price of the security is above or below the average, and by how much. That gives you a static appraisal of the situation.

You can also look at the current direction (up or down) and steepness of the slope of the graph. Now you can see the rate of change in the price. The steeper the slope, the faster the price is changing. The rate of change is the first derivative. It shows what is happening in a dynamic sense, and shows the current price momentum.

To see the second derivative of the price movement, which is a more precise predictive measure of future action, you look at the curvature of the graph. Concave is positive, and convex is negative. The shorter the radius of curvature, the higher the value. This is the second derivative. Put another way, you are looking at which way the trend is trending, and how fast it is doing so. Is an upward trend gaining in power (concave curve), or is it starting to peter out(convex curve)?

The bottom line is of course that the best investing opportunities often occur when a long downward slope in the charts has progressively flattened into a curving bottom. That is, when the first half of a bowl-shaped bottom has been completed. Upward momentum has been demonstrated in a dynamic way, even though the price has no risen significantly yet. You have a chance to get in at the bottom.

Another interpretation is to say that a price chart showing an upward slope is not necessarily exciting by itself, but if the slope is increasing, then there is a higher probability that the upward movement will continue.

Putting the analysis another way entirely, you could say that momentum is a good thing, but rising momentum is even better.

Nothing new really; just a catch phrase of the sort that money managers and board posters like me like to use to sound knowledgable.

Good luck,


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