5 Major Stock Investing Strategies for Value Investors
For most investors, the best approach to owning stocks is through low-cost, broadly diversified index funds, dollar cost averaging and reinvesting dividends. A few investors (often successful business owners, executives or academics) prefer to select individual stocks, building a portfolio brick-by-brick based upon an analysis of the individual firms.
For those few do-it-yourself investors, the father of value investing himself, Benjamin Graham, identified five categories of common stock investing that could conceivably result in better-than-average returns. For an engaged portfolio manager who wanted to compound capital, he spelled these out in his 1949 edition of The Intelligent Investor.
The 5 Strategies
- General Trading: Anticipating or participating in the moves of the market as a whole, as reflected in the familiar "averages."
- Selective Trading: Picking out stocks which, over a period of a year or less, will do better than the market.
- Buying Cheap and Selling Dear: Coming into the market when prices and sentiment are depressed and selling out when both are exalted.
- Long-Pull Selection: Picking out companies which will prosper over the years far more than the average enterprise. (These are often referred to as "growth stocks.")
- Bargain Purchases: Selecting issues which are selling considerably below their true value, as measured by reasonably dependable techniques.
Who Was Benjamin Graham?
In case you were wondering, Benjamin Graham was an investor and author. As I mentioned above, he is considered the father of investing because he was one of the first people to use financial analysis to invest in stocks. And he did so successfully. Graham created many of the standards and principles that many modern investors are still using today. In fact, he's also known as Warren Buffett's mentor.
What Does Graham Mean?
Graham goes on to address the specific quandary every active investor will face in determining how to manage his or her portfolio saying, "Whether the investor should attempt to buy low and sell high, or whether he should be content to hold sound securities through thick and thin—subject only to periodic examination of their intrinsic merits—is one of the several choices of policy which the individual must make for himself. Here temperament and the personal situation may well be the determining factors."
In short, Graham argues that someone who is close to the business world may be comfortable with an active, buy-low, sell-high strategy. But for the rest of us, simply taking a long-term view and investing in funds that track the market is a more sensible investing strategy.
Consistency is Key
Each approach requires a rational, disciplined, systematic application. The key is consistency. Personally, I engage in the 3rd, 4th, and 5th techniques when managing my own portfolios, as well as the portfolios of my businesses. They fit nicely with my own preferences and values; I like thinking long-term about a few big ideas. I don't want to be stuck at my desk watching what the stock market does on any given day or week. In fact, I don't have an opinion about whether stocks will be up 50% or down 50% this time next year, nor would it matter to me. I have a life to live and money is nothing more than a tool to help me achieve or access the things I want. Other successful investors don't feel that way—several engage in short-term bets with highly leveraged futures on the stock market indices, something I refuse to do despite understanding and appreciating it.
I also have the heart of a farmer—I like watching things grow. It gives me tremendous joy to see well-bought positions acquired during crashes, recessions, and dips, that sit on my balance sheet. I love seeing them grow, pay dividends, and sometimes even spin off into entirely new companies. This means I necessarily restrict myself to a mere fraction of the publicly traded companies in the United States and firms in the world. I value them, then wait until the economy, or circumstances, present an attractive moment in time where I can buy them. And I tend to hold on to my investments for a long time.
The Bottom Line
In this particular area of portfolio management, there is no right or wrong answer as long as you are behaving rationally, using facts and data to back up your practices, and constantly striving to reduce risk, while maintaining liquidity and the safety. You have to decide for yourself what kind of investor you are going to be.