How to determine your investment style?
Investing greats are often known for their unique style of investing. The moment you hear of value investing, Warren Buffett leaps to mind; Peter Lynch reminds us of growth investing; Howard Marks of distressed debt; George Soros or Stan Druckenmiller are known for their macro trades; Jesse Livermore, a trader. And the list goes on.
Investment Strategies To Learn Before Trading
Here, we look at four common investing strategies that suit most investors. By taking the time to understand the characteristics of each, you will be in a better position to choose one that’s right for you over the long-term without the need to incur the expense of changing course.
Strategy 1: Value Investing
Value investors are bargain shoppers. They seek stocks they believe are undervalued. People often cite legendary investor Warren Buffet as the epitome of a value investor. He does his homework—sometimes for years. But when he’s ready, he goes all in and is committed for the long-term.
One study from Dodge & Cox determined that value strategies nearly always outperform growth strategies “over horizons of a decade or more.” The study goes on to explain that value strategies have underperformed growth strategies for a 10-year period in just three periods over the last 90 years. Those periods were the Great Depression (1929-1939/40), the Technology Stock Bubble (1989-1999) and the period 2004-2014/15.
Strategy 2: Growth Investing
Rather than look for low-cost deals, growth investors want investments that offer strong upside potential when it comes to the future earnings of stocks. A growth investor considers the prospects of the industry in which the stock thrives. You may ask, for example, if there’s a future for electric vehicles before investing in Tesla. Or, you may wonder if A.I. will become a fixture of everyday living before investing in a technology company.
According to a study from New York University’s Stern School of Business, “While growth investing underperforms value investing, especially over long time periods, it is also true that there are sub-periods, where growth investing dominates.” The challenge, of course, is determining when these “sub-periods” will occur.
Strategy 3: Momentum Investing
Momentum investors ride the wave. They believe winners keep winning and losers keep losing. They look to buy stocks experiencing an uptrend. Because they believe losers continue to drop, they may choose to short-sell those securities.
Traders who adhere to a momentum strategy need to be at the switch, and ready to buy and sell at all times. Profits build over months, not years. This is in contrast to simple buy-and-hold strategies that take a set-it-and-forget-it approach.
Strategy 4: Dollar-Cost Averaging
Dollar-cost averaging (DCA) is the practice of making regular investments in the market over time, and is not mutually exclusive to the other methods described above. The benefit of the DCA strategy is that it avoids the painful and ill-fated strategy of market timing. When investments happen in regular increments, the investor captures prices at all levels, from high to low.
Dollar-cost averaging is a wise choice for most investors. It keeps you committed to saving while reducing the level of risk and the effects of volatility. New and experienced investors alike are susceptible to hard-wired flaws in judgment. Loss aversion bias, for example, causes us to view the gain or loss of an amount of money asymmetrically. Additionally, confirmation bias leads us to focus on and remember information that confirms our long-held beliefs while ignoring contradictory information that may be important.
If we are traders, we deify eminent and successful traders; if we are investors, we do the same with famous investors. For example, a generation of investors blindly followed Buffett and avoided tech stocks just because he said it was not within his circle of competence. And guess what, they missed the best companies and winners in last 20 years – Google, Apple, Microsoft, Amazon etc.
Rules of Investing by World's Top Investors
Dennis Gartman: Let Winners Run
His rule above addresses a number of mistakes young investors make. First, don't sell at the first sign of profits; let winning trades run. Second, don't let a losing trade getaway. Investors who make money in the markets are okay with losing a little bit of money on a trade, but they're not okay with losing a lot of money. If you follow this rule, the money you make on the winning trades will far outpace the losing trades.
Warren Buffett: Do the Research
Buffett gives two key pieces of advice when evaluating a company: First, look at the quality of the company, then at the price. Looking at the quality of a company requires that you read financial statements, listen to conference calls, and vet management. Then, only after you have confidence in the quality of the company, should the price be evaluated.
Bill Gross: Have Conviction
A universal rule that most young investors know is diversification, i.e. don't put all of your investing capital into one name. Diversification is a good rule of thumb, but it can also diminish your profits when one of your picks makes a big move while other names don't. Always keep some cash in your account for those opportunities that need a little more capital and don't be afraid to act when you believe that your research is pointing to a real winner.
Prince Alwaleed Bin Talal: Patience Is Key
When others have sold, notably when Citi was under heavy pressure in the late 1990s, Prince Alwaleed Bin Talal did what many of the best investors do to amass their riches: hold their investments. Investors that have strong convictions and have done the research are able to hold for long periods of time, riding out rocky market events.
Carl Icahn: Be Wary
There is only one piece of advice to act upon: Use your own exhaustive research based on facts (not opinions) obtained from trusted sources. Other advice can be considered and verified, but it shouldn't be the sole reason to commit money.
Carlos Slim: Look Ahead
Successful investors don't look at what's happening now. Instead, by studying the momentum of a company or an entire economy and how it interacts with its competitors, they invest now for what will happen later. They are always forward-thinking.
Can you do both trading and investing?
When it comes to wealth creation in the equity market, investing and trading are the two genres of the field. However, investing and trading are very different approaches to wealth creation or generating profits in the financial market. The main difference between investing and trading is the time horizon. Signals in swing and day trading are primarily technically based because fundamentals don't play a big role in short-term price movements. Longer-term trades or investments can be made on either technical or fundamental data because the hold period is measured in months or years.
Traders look at the price movement of stocks in the market. If the price goes higher, traders may sell the stocks. Simply, trading is the skill of timing the market whereas investing is an art of creating wealth by compounding interest and dividend over the years by holding quality stocks in the market. So the play is to sell the one that spiked if you want to but buy the one that dipped. Trading and investing require two completely different and mostly complementary mindsets, and very few can actually do well in both.
Your goal is to keep feeding your long-term investments through shorter-term trades. If you pick great stocks and hold them over the long term you will build great wealth due in large part to the compounding effect. If you are trading at the same time, by contrast, take advantage of both rising and falling markets to enter and exit positions over a shorter time frame, taking smaller, more frequent profits. Then, you use a part of this income to invest.
Style diversification is as important as portfolio diversification, probably much more important.
How do you choose an investment strategy?
Whatever investment strategy you choose, it’s important to consider your investing goals. Investors will typically begin their investing style choices by first considering their risk tolerance, which can be either conservative, moderate or aggressive. Investment strategies always come with some amount of risk, and in almost every way risk and reward are linked. Investors who pursue higher rewards are usually taking bigger risks.
Beginner investors may prefer to hand their savings off to a robo-advisor — an automated, low-cost investing service — rather than take on the challenge of making all the choices themselves. Active investing can be a lot of work and may not give you higher returns than passive investing strategies.
