After an investor completes their asset allocation and risk management analysis they should choose the best stock investment strategies for their personal investment management. Following are five widely used stock investing strategies and my analysis of the best strategies for the self-directed investor.
Stock Investing Strategies
Value Stock Investing
Value Stock Investing involves buying stocks that are underpriced based on fundamental stock analysis. Value investors estimate the discounted value of all future distributions (intrinsic value) and attempts to purchase a stock below that value, providing a “margin of safety” to the investment. Value investing employs the most important concept of investing: Valuation Matters! Long term studies have shown the patient value investor outperforms the majority of growth investors.
Contrarian Investing
Similiar to Value Investing, Contrarian Investing also involves trying to buy stocks that are undervalued. However, a contrarian investor attempts to exploit studies in behavioral science which measures sentiment regarding the stock among investors. When investors are particularly positive or negative on a stock a contrarian would consider doing the opposite. Contrarian investing is really very similar to value investing. I use contrarian investing more on a Macro level (stock market) to help determine my asset allocation rather than at a Micro level (choosing individual stocks).
Growth at a Reasonable Price
Growth at a Reasonable Price is a middle ground between value and growth investing. GARP investors attempt to invest in companies with above average growth but exclude stocks with high valuations. Growth at a reasonable price includes the important concept of valuation in the buy/sell decision. This makes GARP acceptable for a part of your asset allocation.
Growth Stock Investing
Growth Stock Inveting is a strategy of buying companies of above average growth regardless of valuation metrics that might cause a value investor to exclude the stock from consideration. Growth at any price makes no sense to me. Even if you buy a quality growth company, if you pay too much for the stock you are depending on someone else to pay even more; which is not a wise investing strategy.
Momentum Investing
Momentum Investing is a strategy of buying stocks that have done well over a short period of time (i.e. 3 – 12 month) and selling stocks that have not done well. Momentum investing was popular in the 1990’s but has largely been discredited as the dot.com crash exhibited the downfall of following the herd.
An investor does not have to subscribe to any one strategy. However, everyone should have an understanding of each strategy and a belief system to guide them. As the Portfolio Manager of the Arbor Asset Allocation Model Portfolio (AAAMP), I definitely lean towards the Value Investing side of the spectrum.
What I hope the reader gets out of this article is the importance of understanding what you believe. If you want to be a value investor but you are participating in momentum investing you will probably crash and burn. Understand what you believe and maintain a consistent methodology in implementing your stock investment strategy.
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| AAAMP Blog by Ken Faulkenberry | |
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Ken Faulkenberry earned an MBA from the University of Southern California (USC) Marshall School of Business with an emphasis in investments. Ken has 25 years of investment experience and is dedicated to helping people with self-directed investment management through the Arbor Investment Planner. His asset allocation strategies have an outstanding performance record. |
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