Each year some 40,000 people trek from around the world to Omaha, Nebraska, and it’s not for religion or music. It’s to hear the words of one of the most famous value investors of all time, Warren Buffett, the annual general meeting of Berkshire Hathaway, sometimes referred to as the “Woodstock for Capitalists”.
This is not a man known for making his billions on either fast or high-risk trades. Buffett has said patience is key. But his method, value investing, is only one of the five basic strategies used by people who make a living from investing in stocks.
Value-style managers like Buffett are those who look for companies that are valued lower than their earnings and assets suggest they should be.
A good value play could be one where a company has a low price to earnings (PE) ratio. The company might trade at a low PE because it very small and only lightly traded (if at all – many of Buffett’s picks start unlisted). Another reason for the low PE ratio might be that it is in an unpopular sector, or have positive corporate developments not yet noticed by the wider market.
Within value investing there are several sub-categories such as “deep value”, whereby stocks are bought cheaply with an eye to holding them for a long period of time. “Relative value” is another subcategory where a company might be trading at a lower price than its peers, or compared with its earnings potential as assessed by the investor. Then there’s “new value” which is where investors look for companies with the prospect of significant stock appreciation.
Another style of investing is Growth. This style of investor is looking for companies with a prospect of strong future earnings – as opposed to the value managers looking at existing earnings and assets.
Growth is considered a higher risk method because it is relying on earnings yet to occur, but it also is considered to have greater upside potential because the earnings growth may not yet be factored into the share price.
As an investing style, growth also has a number of sub-categories, ranging from “disciplined growth” which targets companies that might grow earnings above the industry average and are not yet priced accordingly, to “momentum growth” which often relies on technical analysis of a company’s stock price rather than looking at future PE multiples.
Another investment strategy is called Index Tracking. As the name might suggest, this sees the investor buying the securities in a particular index, at the same weighting as the index, or simply buying into index funds. This is considered a passive investing style.
Some investors use a Sector Method, which involves investing in a specific industry. This style is non-diversified and means that if the industry is performing strongly then so too will the investor – such as the mining sector during the period 2008 to 2008 in Australia – or poorly when the when sector is struggling. Think about the tech bubble in the early 2000s.
That last of the five common strategies is Global Investing. In this, a stock picker will look for a portfolio of assets from around the world. These kinds of investors can include sector investors, index trackers that trade based on world market capitalization weightings, or technical traders.
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