Many successful investors adopt an investment strategy that fits their goals and tolerance for risk. While there are many variations, most strategies fit within one or more of these:
- Buy and Hold
Table of Contents
Investment strategies can be selected on the basis need and goal in life. It is important to identify clear reasons for selecting there investment strategy. Market conditions may favor one strategy over the other.
For example, when the market or a market sector is booming, growth strategies become the rage. A down or declining market may favor the value investor. However, all strategies can work in almost any market conditions, sometimes the market makes easier than other times.
Types of Investors
Following are the types of investors:
- Growth Investors
- Value Investors
- Income Investors
- Buy and Hold Investors
- Fundamental Investors
- Technical Investors
- Angel Investor
- Active Investors
- Passive Investors
- Emotional Investors
As the name implies, growth investors look for rising stars. They are interested in companies that have high potential for earning growth. High earning growth invariably leads to high stock prices – at least in theory. Growth investors are willing to bet on young (or not so young) companies that show promise of becoming leaders in their industry.
The technology stocks, especially during the late 1990s, were the perfect example of growth stocks. Many of the young companies started with an idea and nothing more and now are large successful companies. Of course, a great many more of those same technology companies started out with an idea and nothing more and ended up where they started. Which is to say that growth investing carries the risk that some of the investments are going to fail.
Value investors look for the stocks that the market has overlooked. Value doesn’t mean cheap as in low per-share price, but underpriced relative to the value of the company. These are stocks the market has passed over while chasing some other industry sector or more glamorous investments. The value investor looks for stocks with a low price/earnings ratio meaning the market is not willing to pay much in the way of a premium for the stock.
Of course, the value investor needs to make sure there in nothing wrong with the company that would warrant a low stock price other than neglect or market inattention. Assuming the company is solid, the value investor’s strategy is to buy and hold the stock, anticipating the future time when the market will recognize the company’s worth and bid the stock up to its true value.
In addition to extensive homework on the company and its role in the market, the value investor must be patient to buy at a great price – much below the true value. This gives them the margin for profit when the company’s fortunes improve.
Income investing is the most straightforward of all strategies and the most conservative. Income is the motivation and investors target companies paying high and consistent dividends. People near or in retirement are fond of this strategy for obvious reasons. The companies that qualify for the income investor tend to be large and well-established.
There is always some risk involved in investing in stocks, however, this remains the most conservative of the investing strategies. Income investors are more interested in current income and capital preservation. If the stock price increases, that’s icing on the cake for the income investor who would probably trade some capital appreciation for a higher dividend.
Buy and Hold Investors
Buy and hold investors believe ‘time in the market’ is a more prudent investment style than “timing the market.” The strategy is applied by buying investment securities and holding them for long periods of time because the investor believes that long-term returns can be reasonable despite the volatility characteristic of short-term periods. This strategy is in opposition to absolute market timing, which typically has an investor buying and selling over shorter periods with the intention of buying at low prices and selling at high prices.
The buy-and-hold investor will argue that holding for longer periods requires less frequent trading than other strategies. Therefore trading costs are minimized, which will increase the overall net return of the investment portfolio.
Fundamental analysis is a form of an active investing strategy that involves analyzing financial statements for the purpose of selecting quality stocks. Data from the financial statements is used to compare with past and present data of the particular business or with other businesses within the industry. By analyzing the data, the investor may arrive at a reasonable valuation (price) of the particular company’s stock and determine if the stock is a good purchase or not.
Investors using technical analysis (technical traders) often use charts to recognize recent price patterns and current market trends for the purpose of predicting future patterns and trends. In different words, there are particular patterns and trends that can provide the technical trader certain cues or signals, called indicators, about future market movements.
For example, some patterns are given descriptive names, such as ‘head and shoulders or ‘cup and handle.’ When these patterns begin to take shape and are recognized, the technical trader may make investment decisions based upon the expected result of the pattern or trend.
An angel investor, sometimes just referred to as an angel, is an individual who invests private funds in a company or product for personal reasons. The term is sometimes contrasted with venture capital investors, who provide seed capital for similar things from corporate or partnership funds, with financial gain the main motive. Motivations for angel investors include interest in a particular area or a belief in the product, as well as more personal reasons.
An active investor is one that has an explicit or implicit objective of “beating the market.” In simple terms, the word active means that an investor will try to pick investment securities that can outperform a broad market index. These individuals have a high-risk tolerance and less of a need for security. Active investors are more likely to invest on the basis of their experience and expertise and believe that they know more than their advisor does.
They are less likely to delegate the maintenance of those parts of their investment portfolio in which they believe they have experienced or have had personal success. However, these individuals are more likely to be contrarian in their stock-picking habits and have less need to be completely diversified.
The passive investing strategy can be described by the idea that “if you can’t beat ‘em, join ’em.” Active investing is in contrast to passive investing, which will often employ the use of index funds and ETFs, to match index performance, rather than beat it.
Passive Investors are individuals who have become wealthy passively – by inheriting, by a professional career or by risking the money of others rather than their own money. To these investors, security is more important than risk. These investors are risk-averse, they tend to like diversified portfolios of investments in quality companies or investment products.
Emotional investors make decisions by impulse or hype and they have great difficulty disengaging from poor investments or cutting losses. Their investments are fueled by irrational exuberance and irrational pessimism. Emotional investors systematically overestimate their ability to predict the next move in the price of different stocks, take shortcuts, rely on stories rather than detailed data analysis; and end up taking excessive risks.
These investors are easily attracted to fashionable investments or ‘hot’ tips, and act with their heart and not their head. These investing strategies take in a large number of investors, however it is not required that you fall purely in one camp or another. As a practical matter, you will likely modify your investing philosophy as your life circumstances change.
Read More Articles