The 5 Major Stock Investing Strategies for Value Investors

Buy and Hold Is Just One of Five Ways to Benefit from Attractive Opportunities

Benjamin Graham and Value Investing Strategies
Benjamin Graham identified five types of value investing strategies for common stocks that the aggressive or enterprising investor might pursue to seek attractive returns. Looking Glass / Blend Images / Getty Images

For most investors, the best approach to equity ownership is a consistent dollar cost averaging program setup, with dividends reinvested, into a low-cost, broadly diversified index fund tracking something such as the S&P 500 or the Dow Jones Industrial Average.  A few investors, often successful business owners, executives, or academics, prefer to select individual securities, building a portfolio brick-by-brick based upon an analysis of the individual firms.

The 5 Strategies

For those few do-it-yourself investors, whom are often called active investors, enterprising investors, or aggressive investors - the father of value investing himself, Benjamin Graham, identified five categories of common stock investing that could conceivably result in satisfactory or more than satisfactory returns.  For an engaged portfolio manager who wanted to compound capital, he spelled these out in his 1949 edition of The Intelligent Investor:

  • General Trading - Anticipating or participating in the moves of the market as a whole, as reflected in the familiar "averages"
  • Selective Trading - Picking out issues which, over a period of a year or less, will do better in the market than the average stock
  • 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

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 personal situation may well be the determining factors.  A person close to business affairs, who is in the habit of forming judgments as to the economic outlook and of acting on them, will be inclined naturally to make similar judgments about the general level of stock prices.  It would be logical for such investors to be attracted to the buy-low-sell-high technique.  But professional men and wealthy people not active in business can more easily immunize their thinking from influence of year-to-year fluctuations.  For this group the more attractive choice may be the simpler one of buying carefully when funds are available and laying the chief stress on the income return over the years."

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 to 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, some with nearly 1,000% gains, throwing off years and years of cash dividend distributions, and, in a few cases, spin-offs of entirely new companies.  This means I necessarily restrict myself to a mere fraction of the 15,000 publicly traded companies in the United States, and 30,000 firms in the world.

 I value them, then wait until the economy, or circumstances, present an attractive moment in time where I can write a few large checks and stick the certificates in the proverbial vault, never to see the light of day for decades.

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 which kind of investor you are going to be.