There can be various different approaches in the stock market. In this article we will go through all different investing strategies and which might be the best choice for you.
Before we start you can take a look at the Metrics section. There you can find any metric that you don’t know about.
This will be a work in progress, as many other sections of this website. What that means is that I will continually update this page with new strategies.
Growth Investing
That kind of investing is focused on a company primarily for the runaway of growth ahead of them. What you do is you look at fast-growing companies with a good secular trend in front of them. Those companies usually have higher p/e ratios and tend to be much more volatile.
One of the reasons for that is their valuations are mainly focused on their current and future growth. Higher future growth means higher current p/e, at least in most cases.
I recently had the pleasure of listening to an AMA(ask-me-anything) with the CIO of Draper Esprit. What he said is he is evaluating companies at 6 times gross profit, multiplied by future growth. Bear in mind that they are a VC(venture capital), so their valuations are a bit different in their area.
In the VC world growth is everything and that’s why I put them together with growth investors. The difference is that the risk is bigger than traditional growth investors, as they are investing in start-ups. And start-ups have generally higher risk, but also higher reward.
It’s an interesting concept, but you need to be aware of the higher risks involved. Today you can invest in start-ups through crowdfunding companies such as Crowdcube.
As for more traditional growth investing, it revolves around the same principle. You find a high-growth stock as early as possible in their development and keep investing until the growth is present.
There is also something interesting you will find with time. It’s when growth companies transition to more stable businesses. What happens then is their valuation drops and their stock becomes more stable and have less volatility. That is because growth investors drop the stock and are replaced by more “slow and steady” kind of investors.
My points is that growth investors tend to move more from stock to stock, chasing growth. After all that’s what matters to them the most—current and future growth. Once that growth is gone or slowing down, they move into a different stock.
Nothing wrong with that, just a matter of strategy and personal preference. In fact growth investing can be incredibly successful. We have seen incredible growth stories in the last 20 years with companies such as Amazon or Netflix.
If you are interested in this style of investing, good books to read are Beating The Street by Peter Lynch and 100 Baggers by Christopher Mayer.
Value Investing
This strategy is focused primarily on valuation. While growth investing is very little about metrics such as p/e or p/b, value investing is all about them.
The strategy here is to find companies that are undervalued and enjoy the benefits over the long-term. Of course, this strategy also carries a decent degree of risk. Generally speaking, the stock market is efficient and values companies fairly well.
That means that most companies that seem undervalued are actually fairly valued by the market. Usually the more trouble a company is in, the more investors flee from it. That results in lower valuation, but most of the time this is actually fair. There are industries that usually trade at very low p/e and people think they are undervalued.
While actually the market just values them like that, because they are not the most lucrative. Good examples are auto manufacturing, airlines and different commodities. Those industries have little to no growth and are very capital intensive, which results in a lot of debt in the companies.
That results in companies in those industries being valued below the average p/e or p/b for the market and that is fair. So make sure you keep that in mind while evaluating your next stock.
Otherwise value investing can be an incredible strategy if used right and Warren Buffett(LINK) is the best example for that. He is arguably the most successful investor in history. His track record is of almost 20% average return per year over his more than half a century long career as an investor.
Good books to read on the topic are The Intelligent Investor. It’s written by Buffett’s mentor—Benjamin Graham. Graham is considered the grandfather of value investing and has influenced a plethora of future investors. One of the fundamental books of investing in general.
Other books I would recommend you reading is Warren Buffett’s autobiography The Snowball. It goes through his life and is very interesting to understand his thoughts through the different market cycles.
Another very valuable piece of information is Berkshire Hathaway’s Letters To Shareholders. Warren Buffett writes one of them every year and they start all the way back in 1977. They are all free to read and are a very interesting piece of investing through different times.
Dividend Investing
This is one of the simplest strategies in my opinion. You find high-quality stocks that pay a dividend and you keep receiving dividend cheques from them. Dividend investing is very long-term for two reasons. One, you don’t need to buy or sell too often to receive your dividends. In fact, you don’t need to sell at all if you have done your research well.
The idea is that you buy the given dividend stock and you keep it, possibly forever. As you only use dividends, you don’t need to sell any stocks for income.
A lot of dividend investors loves stocks part of the dividend aristocrats or the dividend kings. Those are companies that have been increasing their dividend for 25 or 50 years respectively.
You probably understand why dividend investors like them so much—those are all steady stocks that have gone through the test of time. Most of them are very boring companies and dividend investors actually like that—a steady business with reliable cashflows that delivers year after year.
A good book I can recommend to you is The Little Book of Big Dividends. It will help you get more into the world of dividend investing.
Dividend Growth Investing
This is how I see it—dividend growth investing is what would come up if dividend investing and growth investing had a kid.
It is one of my favourite strategies, because it gives you both income and growth potential. The idea is to focus on stocks with high growth that also pay dividend. This way you get both stock price growth, as well as dividend growth.
But here is the difference with dividend investing—dividend growth investors don’t really pay attention to the dividend yield as much. It’s all about the dividend growth. Usually those companies have low payout ratios, but big earnings increase that helps for the strong growth of the dividend going forward.
Two key metrics to follow here are dividend growth and earnings growth. That’s what matter the most in this case. Also bear in mind that this is also a strategy with a long-term horizon. You get the benefit of dividend growth after years, or even decades as it is very much based on compounding.
A good book to read on the subject is Dividend Growth Machine. It gives a good overview on the strategy and a good base to build your own portfolio.
Passive Investing
This strategy is very simple and straightforward. It consists of investing in ETFs– Exchange Traded Funds. These ETFs usually track big indexes like the S&P 500 or the FTSE 250 for example. Investing in just one of them gets you instant diversification, so you really don’t need to do much, hence the name—passive.
It is a great option for people with no experience in the markets and provides great long-term returns with basically no hassle and a really small expense ratio. This strategy is also the safest one as you are diversified across the whole market.
There are all kinds of different ETFs and funds in general. If you are interested to know more about them, you can read through my guide to ETF Investing.
John Bogle is the founder of Vanguard. For those of you unfamiliar John Bogle and Vanguard kind of pivoted the idea of index funds and passive investing and it has been growing in popularity over the years.
If you are interested to understand more about index investing, there is no one that can explain that better to you than John Bogle himself and his book The Little Book Of Common Sense Investing.
Summary
As you can see, there are plenty of different strategies that can help you achieve your goals in the stock market.
These are the different strategies in the stock market and all of them have their pros and cons of course. Each one is a good option for generating returns and there are examples of successful people using each one of them.
Everything depends on your personal risk-tolerance, time horizon, level of involvement and level of knowledge about stocks and the economy. Investing is a very personal thing and there is never a good or a bad strategy, it all depends on the individual circumstances.
That is all from me about the different investing strategies, hope you had a good read and choose a strategy that best fits your style.