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Investment Styles/Methodologies

There are more investment styles/methodologies than one can possibly imagine. The impact of the computers coupled with sophisticated software using huge data sets, employing amazingly complex algorithms and statistical analysis on the world of investment methodology has spawned, and continues to spawn, myriad variations on the traditional investment methodology types. A brief description of the most prominent of them is as follows;

Growth Stock Investing: This involves the selection of companies whose market value is and return are low but for various reasons are expected to soon grow at a rate considerably greater than the market and eventually produce an above market return. Current examples would be Airbnb, Amazon, e-Bay, etc. Typically these stocks do not pay dividends.

Value Stock Investing: This involves the selection of companies whose market value and return meet or exceed market expectations and who are expected to grow with the market and produce a steady return. Typically these stocks pay dividends.

Blended Stock Investing: This type of an investment methodology involves the selection of growth stocks, value stocks, large cap stocks, medium cap stocks, small cap stocks and some bonds. The amount and quantity of each type is carefully selected to produce a particular result. In essence, it is a blend of almost all types of traded securities, hence the term.

Technical Analysis Investing: This type of investing involves the selection of stocks that will likely be sensitive to various market factors that reflect price movements such as moving averages, oscillators, and various chart information. The technical analysis investor believes there is no point in analyzing a company’s fundamentals because the market has already done that in the stock price. Technical Analysis is more of a trading technique as opposed to long term investing.

Fundamental Analysis Investing: This type of investing is focused on discovering the intrinsic value of a company and then comparing it to the market price. Thus if the market price is below the intrinsic value then the company is at that moment a good investment otherwise it is not. Value investing is a form of Fundamental Analysis.

Index Investing: Index investing relies on the historical growth in the markets over time as illustrated in the historical returns on commonly published market metrics charts such as Andex. The concept is to invest in a basket of stocks that will in all likelihood mirror the return of a particular index such as the S&P 500. This makes it possible for the cost of investing, particularly in mutual funds and exchange traded funds (“ETFs”), to be drastically reduced from well over 2.0% to 0.15% or less. This type of return purely from the effects of the market has become known as “Beta”. Whereas any value added above the beta return has become known as “Alpha”. Investment managers, mutual funds and ETFs who seek alpha returns have been known as “active” investment managers whereas those seeking only “beta” have become known as “passive” investment managers. The index approach has also been used in bond investing.

Bond Investing: Corporate bonds are known as “fixed” investments because their face value and usually their stated interest rate never change. Their market almost always moves in the opposite direction of the market for stocks. So, if the stock market is up the bond market is usually down. Bonds are investment instruments whose value is dependent on (i) the credit worthiness of the issuer; and (ii) the current market interest rates for instruments having the same or similar terms. Assuming the credit worthiness of the issuers are the same, a bond will be currently priced by the market using the market interest rate with the consequent result that the trading price of the bond will be lower or higher than its face value (what the issuer will pay at the end of the bond’s term). A typical bond portfolio will be “laddered”. This means that bonds in the portfolio will have different remaining terms and interest rates and as they are sold new ones will be purchased to replace the sold ones on the ladder. The goal of laddering is to produce a steady return regardless of the bond market ups and downs.

Smart “Beta” Investing: This is a form of index investing that has become very popular over the last few years. The idea is to enhance index investing returns by substituting for some stocks in the index investing basket others who have and are expected to continue to produce slightly greater returns. The jury is still out on this and there is much debate as to whether this can really be done and if so that it produce a measurably higher return.