Investing is a powerful tool that can help individuals grow their wealth and achieve their financial goals. However, investing without a clear strategy can be like sailing without a compass – you may not reach your desired destination.
Why are investment strategies so important? Well, consider this: without a strategy, investors may be prone to making impulsive decisions based on short-term market fluctuations or emotions. They may chase after the latest investment fad or succumb to fear and sell off investments during market downturns. These actions can lead to poor investment outcomes and hinder long-term wealth accumulation.
Choosing the right investment strategy is crucial because it sets the foundation for your investment journey. It ensures that you are investing in a manner that aligns with your unique circumstances and objectives. Just as different individuals have different goals and risk tolerances, there are various investment strategies available to suit diverse needs.
With the right strategy in place, you can set yourself up for long-term success and make informed investment decisions that align with your objectives. So, let’s dive into the world of investment strategies and explore which one may be the right fit for you.
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 solid 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, 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 a 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
Maruti Suzuki India Limited
The Company, established in 1981, forged a joint venture between the Government of India and Suzuki Motor Corporation (SMC) of Japan in 1982. In 2002, the Company officially became a subsidiary of SMC. Today, it proudly holds the position of the market leader in India’s passenger vehicle segment. With impressive production volume and sales figures, the Company stands as SMC’s largest subsidiary. Presently, SMC retains a significant equity stake of 56.28%.
Maruti Suzuki is available at a PE of 33.72 against its industry PE of 96.58, but there are other factors in play as well, and not only the valuations. But whether to solely buy just because they are undervalued is a question you need to ask your RIA.
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
SBI Cards and Payment Services Limited
SBI Cards and Payment Services Limited is a prominent non-deposit accepting non-banking financial company registered with the Reserve Bank of India (RBI). The company specializes in issuing credit cards to consumers across India. Headquartered in Gurgaon, Haryana, it operates as a subsidiary of the State Bank of India, the country’s largest commercial bank.
SBI Cards and Payment Services Limited holds a strong market position, ranked second in terms of Cards-in-force and Spends. With an active card base of 1.18 Crore (a 12% increase over FY20) and spending amounting to 1,22,416 Crore, the company has showcased remarkable growth.
In terms of outstanding cards, SBI Cards has witnessed an upward trajectory in market share, rising from 18.3% in FY20 to 19.0% in FY21. Similarly, in terms of card spending, the market share has increased from 17.9% in FY20 to 19.5% in FY21.
Growth Investing vs Value Investing
The choice between growth investing and value investing ultimately depends on your investment goals, risk tolerance, and investment timeframe. Here are a few considerations to help you determine which strategy may be more suitable for you:
- Risk vs. Reward: Growth investing tends to offer higher growth potential but also carries higher risk due to the volatility associated with growth stocks. On the other hand, value investing offers the potential for steady returns but may involve lower growth rates.
- Investment Horizon: Growth investing is often associated with a longer investment horizon as investors may need to wait for the growth to materialize. Value investing can potentially deliver returns in a shorter timeframe as the market recognizes the undervalued stocks.
- Investor Psychology: Growth investors are more inclined to embrace market volatility and bet on future potential, while value investors may be more comfortable with buying stocks at a discount and waiting for the market to catch up.
Momentum investing
This strategy relies on the belief that there is a persistent trend in the market. By identifying and investing in assets with positive momentum, investors can ride the upward trend and achieve favorable returns.
Principles of Momentum Investing
- Trend-following approach: Momentum investors seek to identify assets that have demonstrated strong price performance over a specific period, such as three to twelve months. The strategy assumes that these assets will continue their upward trajectory in the near term.
- Emphasis on relative strength: Momentum investing focuses on the relative strength of an asset compared to its peers or a benchmark index. Assets that consistently outperform their counterparts are considered to have strong momentum and are preferred for investment.
- Short holding periods: Momentum investing typically involves shorter holding periods.
- Risk management: Momentum investors often employ risk management techniques, such as stop-loss orders or trailing stop orders, to protect against potential downside risk in case the momentum reverses.
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 2020, 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 stock’s real worth or intrinsic value. 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, the 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 significant gains. The stock since then has gone up and is currently trading at Rs. 506
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 hindrances to the future growth of the company.
Click here to read more about high-dividend-yield 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 passive investment strategy assumes 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.
The chart below shows the comparison between SBI Nifty 50 ETFs tracking the Nifty 50 Index.
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 and an understanding of when to enter or exit a specific stock, bond, or other asset. 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.
