TOP 7 INVESTMENT STRATEGIES: WHICH IS THE RIGHT ONE FOR YOU?
What are Investment Strategies? Investment strategies assist investors in determining where and how to invest…
What are Investment Strategies?
Investment strategies assist investors in determining where and how to invest based on their risk appetite, expected return, corpus size, retirement age, long-term vs. short-term holdings, industry preference, and other factors. Investing plans can be strategized based on the objectives and goals that investors want to achieve.
Investment strategies aren’t static, they must be reviewed regularly as circumstances change.
Value Investing
Investing in value stocks is a strategy that involves purchasing undervalued stocks of strong companies and holding them for a long time. This investing strategy aims to find high-quality and efficient companies that are currently undervalued, and this decision is based on solid fundamental analysis.
In the classic book “The Intelligent Investor” Benjamin Graham, who coined the term value investing and is also known as the “Father of Value Investing”. Warren Buffett, who followed Benjamin Graham, mastered value investing, eventually becoming the world’s wealthiest investor.
Every stock has an intrinsic value, or what its real worth is. An investor can find out a company’s real worth (intrinsic value) by conducting fundamental analysis.
The goal is to purchase stocks that are trading at a substantial discount to their intrinsic value (i.e. they are cheaper than their real value). When you buy an undervalued stock, the price rises to its intrinsic value over time, resulting in a long-term profit.
Value stocks are typically associated with long-established companies with consistent growth rates, comparatively stable revenue, and consistent profitability. Investing in value stocks is not intended to become wealthy overnight.
Example of Value Stock in India
NMDC Limited (National Mineral Development Corporation)
It is a mineral producer owned by the government and administered by the Ministry of Steel. NMDC is the producer and exporter of iron ore. It also runs the country’s only mechanized diamond mine.
Value cannot be the only factor in consideration while taking a position in the stock. Commodity stocks, especially some quality metals are still available at attractive valuations given their consistent underperformance to Nifty from 2009 to 2020. But whether to solely buy just because they are undervalued is a question you need to ask your RIA.
NMDC is available at a PE of 6 against its industry PE of 16, but there are other factors in play as well (like iron ore prices, the demerger of its steel business) and not only the valuations.
Growth Investing
Stocks that are expected to grow at a faster rate than the average rate of the industry in each country are known as growth stocks. Faster growth indicates that the company’s revenues and profits are expected to grow faster than the industry average due to a variety of factors.
Business is operating in an industry that is growing at a very fast rate and is faster than the average growth rate of the industry, owing to increased penetration or adoption among its customers.
The company has innovative products or services that are catching up to its peers in the market faster than its competitors, giving it a competitive advantage.
The company uses new technologies that are not only more productive but also more efficient than existing technology, giving it an advantage over the competition, and driving increased adoption.
These are just a few of the many factors that can cause a company’s growth to accelerate.
For example, oil marketing companies typically do not provide strong growth over oil prices, which fluctuate according to crude oil prices and regulations adding to a lot of volatility rather than one that adds value per unit sold. On the other hand, the majority of NBFC participants have experienced higher-than-average growth in terms of financials and stock price movement.
Growth stocks cannot maintain their rate of growth indefinitely, as technology and trends change. These companies can provide investors with higher returns for a longer period, such as 10-15 years, as they penetrate and gain market share at a rapid rate and generate strong profitability as the market develops and matures around them.
Example of Growth Stock in India
Deepak Nitrite
India’s chemical industry is expected to continue growing at a fast pace due to its strong fundamentals. With the geopolitical shift following the outbreak of Covid-19, India’s chemical companies are gaining favour with global MNCs as the world looks to reduce its reliance on China.
Deepak Nitrite is a well-known chemical manufacturer. The company supplies its products across a diverse range of industries such as Hindustan Petroleum, Emami, Reliance Industries, and Bayer among others, indicating a strong diversified portfolio of customers.
On financials, Deepak Nitrite has a good track record of delivering above-average returns. The company delivered strong growth in Net Profit and Return on Equity (ROE), indicating a strong return for the shareholders of the company. Deepak Nitrite is currently trading at a P/E ratio of 33.9x which values the company attractively among peers.
Growth Investing vs Value Investing
A growth stock is defined by higher price multiples and valuations, low dividend payouts, stronger and more volatile market momentum.
Value stock trades at a lower price multiple than the industry average while generating consistent and stable cash flows and paying dividends to investors regularly, ensuring consistent cash returns for shareholders.
Momentum investing
In March 2020, the market experienced a significant correction which was followed by a sharp turnaround.
Following the market correction, more retail investors flocked to the market, resulting in significant gains in almost every listed stock. But, the majority of these stocks did not deserve the price inflation they experienced.
Retail investors tend to pick stocks of well-known and talked-about companies without thoroughly researching their fundamentals. They choose stocks based solely on speculative information circulating in the market.
This pattern where investors follow the market trend and invest in stocks that are in the news or stocks of industries that are currently having a huge uptrend without giving more importance to the fundamentals of the stock is called momentum investing.
Buying stocks that have been trending upward or short-selling stocks that have been trending downward is referred to as momentum investing. The main benefit of momentum investing is that once a trend has been established, it is more likely to continue.
Example of Momentum Investing in India
During the pandemic, domestic pharmaceutical companies have seen massive price increases. The Nifty Pharma index has increased by 40% in the last year, indicating the superiority of pharmaceutical stocks. Many investors jumped on board to take advantage of the trend and make quick gains. This strategy to go along with the market trend is called momentum investing.
Contrarian Investing
The world was rocked by a terrible financial crisis in 2009. Investors panicked, and stock markets all over the world crashed. The outcome of this was huge selling by investors in the market. Similarly, when investors are happy, the markets may continue to rise for a while. But this bubble eventually bursts. Herd mentality is exemplified, a significant number of investors blindly follow the investment strategies of seasoned investors.
This is why many investors choose to go against the market trend rather than follow the herd. This strategy is called Contrarian Investing. Warren Buffett is the most vocal supporter of this strategy. Warren Buffet’s famous quote is, “Be greedy when others are fearful, and fearful when others are greedy.”
When you hear that a company’s stock is performing well, you want to buy it. Similarly, any negative news may cause investors to panic and overreact to the news and eventually sell their stocks. This frequently results in an overvaluation of a stock. In this case, the share price does not reflect the real worth or intrinsic value of the stock. Stocks almost always fall or rise to their true value in the long run.
The contrarian investor recognizes the disparity between the current share price and its true value. This encourages him to invest in an otherwise unpopular company.
Examples of Contrarian Stock in India
Tata Motors
Tata Motors had come to a low of Rs 169 in Oct 2018, when it came down from Rs 350 in a matter of months.
Some investors expected that Tata motors’ pain won’t last long, there will be a pick-up in automobile sales both in India, UK, and China because of ample liquidity as well as Management would take quick actions for the reduction of the debt.
During the Covid pandemic, the stock went on to hit as low as Rs 65. At this point, the stock was extremely cheap for a brand like Tata motors which had great revenue-generating capacity.
Contrarian investors took a bet on the stock when it was falling and made some major gains. The stock since then has gone up and is currently trading at Rs. 290.
Income Investing
Rather than investing in stocks that only increase the value of the portfolio, this strategy focuses on generating cash income from them. An investor can earn two types of cash income. Dividends from equity and fixed interest income from bonds. This strategy is chosen by investors who want a steady stream of income from their investments.
Picking the stocks with the highest dividends is not the right strategy. That may seem counterintuitive, but companies often pay out large dividends for a reason. There could be underlying business issues, which can cause hindrance to the future growth of the company.
Examples of Dividend-paying stocks in India
India Tobacco Company (ITC)– ITC has maintained a dividend payout of more than 50% for the past ten years and has reached 100% this year, with a dividend yield of 5.19%. It has a strong and consistent dividend history, making it an excellent dividend bet.
Oracle Financial Services Software (ORCL)– It has a payout ratio of 97.7% and a dividend yield of 4.98%, making it one of the highest dividend-paying stocks.
Passive Investing
Passive investing is an investment strategy that aims to maximize returns by minimizing the amount of money spent on frequent buying and selling.
The goal of passive investing is to avoid the fees and poor performance that come with frequent trading and to build wealth gradually. Passive investing, also known as a buy-and-hold strategy, entails purchasing security to hold it for the long term.
Passive investors aren’t looking to profit from price fluctuations or market timing in the short term. The assumption behind the passive investment strategy is that the market will generate positive returns over time.
Examples of Passive Investing style in India
ETFs, or exchange-traded funds, are an excellent example of passive investing. ETFs are the collection of securities that track an underlying index. A Nifty 50 ETF tracks the Nifty 50 Index’s composition. When you buy a Nifty ETF, you’re getting exposure to the Index’s 50 stocks.
Index Mutual Funds are another way of passive investing strategy which invests in stocks that imitate a stock market index like the NSE Nifty, BSE Sensex, etc.
Active Investing
Active investing is a hands-on approach. Active money management seeks to outperform the stock market by exploiting short-term price fluctuations. It necessitates a much more thorough examination as well as an understanding of when to enter or exit a specific stock, bond, or other assets. Active investors must monitor both qualitative and quantitative factors of the stocks.
Examples of Active Investing style in India
Large-cap, mid-cap, and small-cap funds of different mutual fund houses are actively managed funds that use the active investing style.
Ending Note
There are a variety of investment strategies that suit different risk profiles, involvement, and timing. Understanding your personal preferences and financial situation is key to determining the best strategy. An investing strategy that works for someone might not work for you. When it comes to investing, there is a lot at play, it is better to consult financial advisors to help you with the investment strategies. If you do not want to go the traditional route you can try modern new-age advisors like Tavaga.
Disclaimer: This write up is solely for educational purposes. This in no way should be construed as a buy/sell recommendation. Please consult your investment advisor before investing.
