- Why have an investment strategy?
- Different types of investment strategies and their benefits
- How to pick a strategy best for you?
- Some popular strategies used by market mavens
There are many investment strategies, each with its pros and cons. So, how will you choose a strategy that’s perfect for you?
Merely chasing historical returns may not be the best way to adopt an investment strategy. Your style or strategy should be such that it takes care of your investment objectives and risk tolerance.
An investment strategy is a consistent and methodical approach to investing. It can help you achieve your investment goals in a systematic and optimal manner. Choosing the ideal investment strategy should be like picking the perfect clothes. It should be such that it makes you feel comfortable and is right for the occasion.
Benefits of investment strategy
- Enables you to set investment goals and know if you are achieving those goals
- Helps make investment decisions based on certain criteria that have stood the test of time
- Can be based on certain themes
- Brings discipline and method to investing
In a two-part finale to Module 3, we will equip you with knowledge of investment strategies so that you’re prepared as you begin your investment/trading journey.
A list of popular investment strategies
This is nothing but looking for bargains or waiting for a sale to buy stocks. In this strategy, investors look to buy assets for less than what they are worth by uncovering the asset’s intrinsic value. Warren Buffet is said to be one of the greatest proponents of value investing.
Value investing requires a fair understanding of companies’ financials and certain modelling techniques. In simple terms, it is the present value of all expected future cash flows of a business discounted by an appropriate discount rate.
Compared to other investing strategies, which look to compare different companies, value investing looks at the intrinsic value of the business or stock in isolation.
Some basic metrics to arrive at the intrinsic value are also using the Price to Book Value (P/BV) of a company. If the price of the share (Rs 100) is lower than the book value (Rs 130) of the company, it could signal a value buy.
Warren Buffet is one of the greatest proponents of value investing.
This is one of the oldest and most basic investment strategies. Unlike value investing, where investors wait for the value to unlock itself, growth is an active investing strategy.
Investors look for companies that are consistently growing and have a tendency to display strong growth in revenue and earnings. Software companies are good examples.
Adopting a growth strategy gives investors exposure to the fastest-growing companies within a sector. Your money is invested in stocks of companies that have the chance to generate high returns.
However, the flip side of growth is that these stocks tend to have the highest valuation in the market. They need to consistently justify their high valuations or they risk losing favour with investors. This can lead to a quick erosion in share price.
For growth investing, it is important to understand the earning potential of the company – current, past and historical earnings, too – as these can help evaluate the current earnings in relation to its past trend. This will also help to understand if the company can stay on its high-earning trend.
Momentum investors believe what is going up will keep going up, and what is going down will keep going down. They ride the momentum in share prices. The rationale behind this strategy is that once a trend is established, it is likely to continue.
In some ways, momentum investing is similar to growth investing. While growth seeks a rise in earnings, the momentum looks for a continued upward or downward movement in the share price. These investors are not concerned with companies’ financials.
Momentum investors are mostly technical analysts. They look for technical indicators to understand trends and determine the momentum in the share price. This strategy is mostly short-term in nature, as the objective is to capture quick upward or downward movements in share prices.
Some of the indicators in momentum investing include:
Trend lines are technical analysis tools used to draw a line between successive points on a share price chart. If the line slopes upwards, it indicates a bullish trend with prices moving up. If the slope is downwards, the trend is negative, and the action could be to short-sell those shares.
Moving averages are used to identify a trend in a share price. If the price constantly remains at or above a moving average, it is a bullish indicator and vice versa for a bearish trend.
Momentum can be a high-risk, high-return strategy.