The short version
Most investors are taught to buy low and sell high. Richard Driehaus did the opposite: he bought stocks that were already rising, usually because their earnings were growing fast and beating expectations, and sold them higher. He cut losers quickly and moved the money into the next strong name. The idea that strength tends to continue is what investors now call momentum.
Who he was
Driehaus (1942 to 2021) was a Chicago fund manager. After working as an analyst and portfolio manager at other firms, he founded Driehaus Capital Management in 1982 and ran growth portfolios built on his momentum approach for decades, much of it in smaller and mid-sized companies. Barron's named him to its All-Century team of the top money managers of the 20th century.
He was also well known in Chicago as a collector and patron of architecture and design. The Richard H. Driehaus Museum occupies a restored Gilded Age mansion in the city, and the Driehaus Prize, awarded through the University of Notre Dame, honours classical and traditional architecture.
His method
- Buy high, sell higher. A stock making new highs is telling you the market already sees something good. He preferred those to stocks that looked cheap after falling.
- Earnings first. He looked for fast, accelerating earnings growth, and above all for earnings surprises: results better than analysts expected, followed by rising estimates.
- Strength against the market. The stock had to be acting better than the market as a whole.
- Sell the disappointments. When earnings missed or the price stopped acting well, he sold, even at a loss, and moved on to something stronger.
Why the surprise mattered more than the growth
A company everyone knows is growing at 30% a year is usually priced for it. What moves a stock is news the market didn't expect. When a company reports earnings well above forecasts, analysts raise their estimates, often over several weeks, and the price tends to climb as they do. Driehaus wanted to own the stock while that repricing was still under way.
That is also why he paid attention to the price. A big surprise followed by a stock that refuses to rise is a warning that the good news was already known, or that larger holders are using it to sell.
How he sold
Driehaus was known for high turnover. He held a stock while its earnings kept improving and its price kept acting well, and sold it when either one broke down. He didn't wait for a loser to come back to his purchase price, and he didn't hold a stock out of loyalty after its story had changed. The money went straight into a stronger name.
The research behind it
Academics later measured what Driehaus traded on. In a widely cited 1993 study, Narasimhan Jegadeesh and Sheridan Titman found that US stocks with the strongest returns over the previous three to twelve months tended to keep outperforming over the following months. A separate line of research, going back to the late 1960s, found that stocks tend to keep drifting in the direction of an earnings surprise for weeks after the announcement, an effect known as post-earnings-announcement drift.
Neither effect works every month. Momentum in particular can reverse sharply at turning points, when the market's laggards suddenly rally hardest. That is the risk Driehaus's fast selling was built to contain.
Using his method here
- Momentum stocks: the strongest US stocks by relative strength, in uptrends, tonight.
- Growth stocks: companies with fast earnings and sales growth that are also in uptrends.
- CANSLIM screener: O'Neil's version of the same pairing of earnings and price leadership.
- Episodic pivots: big gaps on heavy volume, often the market's first reaction to an earnings surprise.
Questions people ask
Who was Richard Driehaus?
An American fund manager (1942 to 2021) who founded Driehaus Capital Management in Chicago and built one of the best-known growth and momentum records of his era. Barron's named him to its All-Century team of money managers.
What does buy high, sell higher mean?
Driehaus argued that more money is made buying stocks that are already rising, often at new highs, and selling them higher still, than buying cheap stocks and waiting for them to recover. A rising price showed that the market was already recognising the company's improvement.
What did Driehaus look for in a stock?
Strong and accelerating earnings growth, earnings that beat what analysts expected and estimates being raised, and a stock price that was already rising and showing strength against the market. He sold when the story or the price action turned, without waiting to get back to break-even.
Is momentum investing the same as growth investing?
They overlap. Growth investing buys companies whose earnings are growing fast; momentum investing buys stocks whose prices are rising faster than the market's. Driehaus wanted both at once: the growth in the business and a price that was already confirming it.
Why is Driehaus called the father of momentum investing?
He ran money on the idea that strength tends to continue long before it had a common name, and his long record with it made the approach credible to professional investors. Academic research later documented the same effect across decades of market data.