How Investors Make Money- Introduction and Overview
WHAT ARE INVESTMENT STRATEGIES?
Investment Strategies are a set of rules, behaviors, and procedures that shape an investor’s portfolio by influencing their choice of stocks. Different Investment strategies arise due to several factors like different profit objectives, different investors have different skills and tactics, and other major reasons include the differing risk ability and risk willingness of investors.
Risk ability is the amount of risk a person can take. It depends on the resources and disposable income that person has whereas risk willingness is the willingness to take a risk or the risk appetite of a person. Many say that there exists an inverse relationship between risk appetite and the age of the person. For example, younger people around the age of 25 are seen taking riskier avenues of investments whereas old people after retirement are usually observed to invest their money in secure assets like bonds and fixed deposits.
WHAT ARE THE VARIOUS TYPES OF INVESTMENT STRATEGIES?
This strategy simply means imputing the intrinsic value of a stock and using that to see if the stock is undervalued i.e. if the market value of a stock is less than its intrinsic value, thereby investing in it. There are different ways to calculate the intrinsic value of a share, one common method is using DCF (Discounted Cash Flow) which is a part of Fundamental Analysis which uses the concept of TMV (Time Value of Money).
Next in investment strategies is growth investing. It’s a style of investment strategy focused on gains via capital appreciation. This involves investing in companies that show above-average growth.
This is a type of investment strategies that implies investing in small-cap shares or penny stocks. It is based on the principle that penny stocks already have a low value, hence there’s only one way they will go and that is up. In addition to that unlike the blue-chip stocks, they are less publicized hence there is a lack of rumors in the market about them. As many investors say, “no news is good news”
4)Socially Responsible Investing
It is based on investing in companies that are leaders in CSR (Corporate Social Responsibility).CSR are initiatives taken by the companies to work on social or environmental, it can range from initiatives ranging from reducing CO2 level in the atmosphere to promoting gender equality in the workplace. It is believed such initiatives increase the value of goodwill of companies.
It simply means investing in avenues that others are apprehensive of and going short on those that others are confident about. To understand this better, let’s take an example, if in today’s world someone shorts crypto especially dogecoin (when Elon Musk is trying to take it to the moon figuratively), that would be an example of contrarian investing. It works on the principle that certain crowd/sheep behavior amongst investors can lead to exploitable mispricing.
This is the investment strategy that aims not on investing in stocks with high growth for capital accumulation, but in stocks that give regular incomes to the shareholders via dividends. Its major motive is hence earning regular income via the shareholders in the form of dividends.
Note: The author personally believes even though technical analysis is obligatory to learn before entering into the field of finance, it is something that is useful for traders as it helps in finding entry and exit points not investing(Long Term).
RENOWNED INVESTORS USING THE ABOVE STRATEGIES
Warren Buffet is considered to be the best investor by many. His strategy for the most part before investing in any stock has been valuing investing, wherein he imputes the (ROE)Return on Equity for the last 5-10 years to analyze the true potential of the company.
In addition to that, he also looks at the debt-to-equity ratio preferring companies with as little debt as possible hence going for companies with low debt to equity ratios.
And last but not the least, he looks for profit margin being earned by the companies, hence going for companies with high-profit margins.
THOMAS ROWE PRICE JR.
He is considered to be the father of growth investing as he was the one who defined and promoted the phenomenon. It was his belief that investors could earn superior returns by investing in such companies whose earnings and dividends are expected to grow at a higher rate than inflation hence acting as a hedge against inflation and the overall economy. He did so by charging a fee based on the (AUM)Assets Under Management which binds the success of the investment firm to the success of the portfolio and stocks invested in.
CHARLES (CHUCK) ROYCE
He is the head of Royce investment partners that invest primarily in micro-cap and small-cap companies using disciplined and value-oriented approaches. He looks primarily at balance sheet strength, cash flow characteristics, Royce emphasizes long-term absolute performance as compared to the relative performance of the small-cap stocks.
A famous contrarian investor who made large sums of money by betting against the real estate market before the crisis of 2008, it was considered to be an eccentric move by many as real estate was considered as the safest bet for investors after the dot com bubble burst, however, he saw something that no one did that is a major credit bubble being formed in the market due to issue of subprime mortgages and constant default on credit instruments, it was this that led him to bet against the real estate sector which proved out to be a success for him.
She is often referred to as a ‘dividend detective’ as she constantly focuses on investing in companies that give good and consistent dividends as opposed to looking at their growth and earnings. She popularized the theory of using dividend yield as a valuation metric by indicating that there exists a strong relationship between a company’s ability to pay dividends over time and its performance in the stock market. It’s this strategy of hers that makes her widely regarded as the most successful female investor in a male-dominated occupation.
There is no one perfect investment strategy as different strategies have worked for different investors, it clearly depends upon several factors like risk ability, risk willingness, and knowledge to apply a certain strategy so as to gain success from the same.