Stock investing strategies: which suits you best?

For most investors stock holdings make up a significant portion of their overall wealth regardless of how diversified they are in other investment vehicles. When investing in the stock market, there are numerous investment strategies for investors to take, each of which has its own pros and cons for each individual to consider.  

So which one do you think suits you best?

 

Buy and Hold

Buy and hold is a passive investment strategy where an investor invests in and holds a stock for a long period of time. Long term investing is typically about 10 years. This strategy is based on the core assumption that stock values will go up over time, regardless of the month to month or even year to year swings that the stock market experiences.  

Historical data shows that this trend has held true as economies continue to expand and markets mature.  

This strategy has its benefits. The investor will incur lower transaction costs, as only few transactions take place, and typically lower taxes, as there are fewer triggered capital gains. While it is a generally passive strategy for an investor, it is important to be aware of trends in the companies as over 10 years a reasonably successful company can slip into irrelevance, Kodak being a good example.

This strategy is appropriate for patient investors who can restrain themselves and not to react to sudden upticks and downswings in stock prices. Due to its long term nature, it’s also more appropriate for an investor in their 20s or 30s than it is for an investor in their 60s.

 

Value Investing

Value investing is a strategy that focuses on buying stocks that are selling for a relatively cheap price compared to what the investor believes they should be trading at. The goal here is to find underpriced stocks that will see an adjustment in the future to reflect their true market value. 

This strategy typically involves an investor utilizing their own, or a publicly published, methodology to value stocks, often with a focus on less actively traded stocks. When underpriced stocks are identified, the investor then buys and waits until the stock price adjusts or the valuation methodology no longer supports the investment.

Value investing is typically used by sophisticated investors who have the time available to create their own valuations of a stock. With a good model set up, this can be done fairly quickly but it does need the investor to maintain their valuations going forward as new information becomes available. The time commitment is there but is significantly lower than that taken in a market timing strategy.

 

Growth Investing

Growth investing is a strategy that focuses on the potential earnings growth of a company under the expectation that that future growth will drive increases in stock price. The focus for many growth investors is on earnings per share and the price to earnings ratio. Companies with higher ratios (for both or either) when compared to the share prices of their peers are targets for a growth investor.

The typical growth investor would have the same profile as a value investor in terms of skill set and approach as this does require ongoing work and re-modelling as new information becomes available.

 

Market Timing

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At its core, this strategy is the opposite of the buy and hold strategy. Those taking on a market timing strategy have a belief in their ability to predict the ups and downs of the stock market and take advantage of those predictions to maximize their returns. Often when investors put their money with a hedge fund or mutual fund they are, by proxy, taking a market timing approach.

The fund managers are actively buying and selling stock with the pooled resources of many investors based on their perceived ability to take advantage of the ups and downs in the stock market. The methodologies taken by these managers can be broad. For example, technical or fundamental analysis are approaches based on a market timing strategy.  

This strategy will only be successful for individual investors with a fair degree of financial sophistication as well a significant amount of time available to research and manage their strategy. This is due to the fact that they need to constantly be monitoring trends and indicators that impact their strategy. Most working individuals are unable to take a market timing strategy for their portfolio unless they hand responsibility to an active fund manager.

There is no best approach in terms of a stock investing strategy for an investor as each of the strategies above has its success stories and its failures. At the end of the day, it is more about the strategy and how the investor feels about it, and whether or not they have the time and skill to apply these strategies. 

(By Jeffrey Glen)

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