All You Need To Know About Different Investing Strategies

Investment Strategies

An investing strategy, also commonly referred to as the investment philosophy or investment style, is the portfolio investor’s approach to building portfolios. In simplest term it is your method of buying and selling securities that you believe is the right way.

Investing Strategies
Investing Strategies Basics

Every investment you consider has inherent risks along with the potential for return: Increased risk provides the opportunity for higher returns and greater losses. 

Lower risk investments typically offer lower return potential. The amount of risk you carry depends on your appetite or tolerance for risk. 

Only you can decide how much risk you’re willing to take for the potential of higher returns. But it will depend on your attitude toward risk, your goals, risk tolerance and circumstances, and how much of your money you’re investing.

While all of the Investment Masters have great track records of long term success, they naturally all have their own styles. Whether it’s running highly concentrated portfolios, focusing on a select type of asset or having a different time horizon, each has had their own path to success. 

So you have to choose your own path with different goals, expectations and even different reasons for investing. Understanding the type of investor you are is a key step toward understanding what sort of investment approach is best for you. 

“There are many, many different ways to make money in the investment business and the one I describe as ours, it’s not necessarily the only right one but it’s the one we like.”
Howard Stanley Marks. American investor and writer. Oaktree Capital Management.
Howard Marks
Ace Investor

Investment styles can be divided, and further sub-divided, in a number of different ways. In this blog post, we’ll discuss the five major investment strategies that experienced investors use to define their investing. Choosing the right investing style that suits you can be a major factor that determines whether you would become a successful investor. However, before we wander off too far, let’s dive into it.

It is an investing style in which the strategy is to focus on the capital that you’ve invested. The investment is made in growth stocks which are expected to give better returns than the market or the industry average. Here, the focus remains on wealth accumulation by higher capital gains in the long-term. It is alternatively called a Capital Growth Strategy.

An individual who practices growth investing is known as a growth investor. A growth investor seeks out companies that have promising growth potential, even if their stock prices are high in terms of their price-to-book or price-to-earnings ratios.

The kind of young, lean companies that growth investors target are not the establishment companies that channel their earnings into big dividends for shareholders. Instead, they’re likely to reinvest their earnings. If anyone who opt for growth investing, he is probably not too concerned with getting fat dividend cheques in the mail. 

Growth stocks perform really well during bull markets and tend to underperform during bear markets. While making a growth investment, it is very important to keep the investment for a longer term. As short-term investments is not really effective for it.

Growth investing can be accomplished by investing into:

  • Common Shares
  • Private Company Shares
  • Warrants 
  • Rights
  • Options

Value Investing

This investment strategy effectively involves searching for diamonds in the rough, or those companies whose value isn’t currently accurately reflected by the market.

The term value investing essentially means investing in value. It is a strategy where you select stocks which are trading below their fair value. Essentially traders look for undervalued counters and buy them at bargain levels.

The whole idea is that investors behave irrationally to both losses and gains. This strategy helps them to capitalize on this irrationality and profit from it. So, if the valuations don’t match the stock fundamentals, this becomes an opportunity to buy for them.

If the fundamentals of the stock support, the price can rise substantially. Investors carefully seek counters that have less than average price-to-book ratio. This is one of the best indicators of fair value. When a stock is trading below the average price to book ratio, it is an undervalued counter. 

Alongside focusing on stocks that are currently mispriced, value investors also focus on companies that pay consistent dividends, showing a company is fundamentally profitable, and paying a portion of profits back to investors. Dividends also help value investors benefit from steady, annual returns, while they wait for the stock to rise in value.

It’s important to remember that dividends aren’t guaranteed. If a company experiences financial difficulties, it may reduce its payout or even stop it altogether.

Value Investing is typically accomplished with:

  • Classic Compounding Stocks
  • Cyclical Stocks
  • Cigar Butts
  • Anti-fragile Stocks

Momentum investing is not typically considered as a main or rather a main-stream investment style, despite defying the efficient market theory over time and giving stellar returns, probably because it involves a high degree of buying and selling. 

The investor would look at existing trends in the market, and the logic is that once a trend has been established, it is likely to continue. In its most basic form, momentum investing is the idea of profiting from the continuation of existing price trends in the market.

Momentum Investing.

Indicators could include the monitoring of price, where a trend line is drawn between two points on a price graph. An upward momentum or trend line would indicate a stock to buy, while a downward momentum or trend line would indicate a stock to sell. 

Sometimes investors may also use a timed momentum strategy. For example, they might use a 300-day average price. When the stock moves below the average by a certain percentage, they will consider it time to sell.

A momentum investment strategy is typically used when investors are looking at companies that are:

  • Smaller.
  • Growth firms.
  • Lower operating leverage.
  • Higher sales volatility.
  • Lower credit quality.

Momentum Investing can be further divided into:

  • Relative Momentum
  • Absolute Momentum

Income Strategies. Dividend Strategies

Sometimes, a company pays a portion of its profits to shareholders. This is called a dividend. A dividend can be paid one time, as a special circumstance, or regularly. It depends on the company in question, and its practices.

Distributions of company earnings are usually proposed and approved by the board of directors of the organization. Most companies declare a dividend each quarter, although there are some organizations that pay monthly and a few that pay annually. These quarterly, monthly, or annual payments are usually paid in the form of cash or additional stock if the shareholder chooses that option.

A dividend payment formula is based on how many shares you own, and the amount per share a company pays. You don’t have to sell any shares to receive a dividend. In fact, it’s better not to if you are involved in dividend investing. It is all about choosing companies or funds that pay regular dividends in the hopes of building your portfolio quicker. You may even eventually be able to create an income stream based on dividend payouts.

Generally speaking, this type of income stream is not subject to market fluctuations, unlike other investments.  Dividend investing offers a much more competitive return on investment in a low interest rate environment. If implemented properly, dividend investing is a safe strategy that can generally withstand any type of market.

When it comes to stocks, dividends can be of type:

  • Cash Dividends
  • Property Dividends
  • Stock Dividends
  • Scrip Dividends
  • Liquidating Dividends

Index investing simply means investing in mutual funds or exchange-traded funds (ETFs) which consist of all or substantially all of the stocks in a given market index . These funds are also known as index-tied or index-tracked mutual funds. It’s a standard measure of the changes in performance within a grouping of stocks; this group serves as a benchmark for the stock market as a whole or for particular parts of the market.

One of the things that are important about investing in index funds is that you can kind of relax. The reduction in anxiety that goes with investing in them is an offset to the uncertainty that’s anxiety with the new administration. With indexing, you avoid being distracted by the tricks of the market.

You’re able to get higher returns than any other way. You’ll outperform other investors in large numbers, for sure. You have lower cost, which is kind of comforting, and lower anxiety. And because you know that everything will be done correctly, you don’t have to worry about operation or implementation. Therefore, you can concentrate on what’s really important about investing, like what you’re trying to accomplish, what resources you have, how much time you have and which portfolio structure would be best for you.

An index investor doesn’t care about picking winners and losers, or making bets.  An index investor just invests, and lets the market do the rest. Index investing is by far the simplest way for you to build wealth.  Just invest, sit back, and forget about it.

Easiest way to accomplish indexing are:

  • Exchange Traded Funds
  • Enhanced index funds

Bottom Line

In the end, you need to put your money to work in a way that fits your age, skill set, income, and risk tolerance. Before you start investing, it’s a good idea to ask yourself what you’re saving and investing for. It can take some time, but finding what works for you is the best way to become a successful investor. Just as taste in clothes or food may differ from person to person, so, too, does one’s investing style. 

With a series of blogs on various investing styles, we have tried to make the reader comfortable with the idea of systematic investing and inculcate a tendency to follow a process in this fruitful journey.

Whether you’re new to investing or already have a plan in place, you can rely on TradeGyani for trusted advice on building your financial future.

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