In this section, we take a closer look at some of the common investment strategies adopted by investors and investment managers!
Indexing
Indexing is a strategy that consists of gaining exposure to broad market indexes. An investor pursuing indexing would purchase an exchange-traded fund (ETF) that tracks an index like Singapore’s Strait Times Index (STI), in effect gaining exposure to all the constituents of the STI. Long term investors who pursue indexing for their investment strategy are known as ‘passive investors’, as they accept whatever returns the broad market indexes deliver. Thus, an investor purchasing a STI ETF at the start of a given year would get close to 6.0% (net of expenses) should the STI gain 6.0% in that given year.
The advantage of indexing is that the amount of commitment (time, homework and resources) needed is lesser than other investment strategies like the ones featured in the rest of the section. This is the reason why long term investors who pursue indexing are often called ‘passive investors’.
Value Investing
Imagine a scenario where you know the true worth of an item that you adore after spending months and even years studying and assessing it. Every time you check out its price tag, it trades at a price tag that you know is correct – the ‘right price’. However, one day, that particular item’s price gets slashed by -30% and you couldn’t believe your luck. You buy it instantly, knowing that you got it at a healthy discount!
The scenario above illustrates a simple process that value investors tend to do. At its core, value investors believe that market prices do not accurately reflect the true value or worth of assets out there. They believe that prices are affected by a whole myriad of complex factors, and their fluctuations would lead to times when assets are mispriced. These mispricings thus creates opportunities for savvy value investors – just like how like you buy something at a discount.
The crux of their strategy involves assessing the real worth of an asset. They do rigorous analysis on companies and find out what their real values are, a term called ‘intrinsic value’ (or fair value). They then compare the current stock prices against their intrinsic values. Should prices be trading below their intrinsic values, then value investors have a buying opportunity. Once invested, value investors will hold their investment until prices revert back to their intrinsic value.
For value investors to succeed, they often require patience as well as discipline in order to execute their strategy efficiently. Additionally, a great deal of careful analysis is also required in order to assess intrinsic values of assets, which could also change over periods of time. Well-known investors like Sir John Templeton, Joel Greenblatt, Benjamin Graham and the octogenarian Warren Buffett are practitioners and proponents of this style of investing.
Growth Investing
Growth investors use equities to play out their investment strategies. They look for companies that display superior growth rates and growth potential relative to their peers and invest in them. The idea is that the superior rate of earnings growth would translate into increases in share prices and shareholder equity. This way, they get to participate in the growth of these companies and to maximise the growth of their invested capital.
Growth investors tend to look in rapidly expanding industries, or at companies that deal with innovative technology. Smaller-sized companies usually are favoured due to their potential for higher growth as compared to big and established companies. Because growth investors are focusing on the future potential of a company, they may invest at prices that could be above a company’s intrinsic value (as opposed to value investors), believing that the intrinsic worth will grow over time. Renowned investors like Peter Lynch, Thomas Rowe Price Jr and Kenneth Fisher are known practitioners of growth investing.
Contrarian Investing
A contrarian investor is an investor who believes that money can be made by investing in a manner that differs from the general consensus opinion. This mentality or philosophy results in contrarian investors steering clear of prevailing market trends, buckling conventional norms and as well as looking into neglected asset classes or markets. A well performing asset that is well-liked by the market or the crowd would usually be shunned by a hard-nosed contrarian, and market segments that had disastrous performance or have fallen out of favour with the investment community usually interests contrarians.
It takes patience and great mental fortitude to be a successful contrarian investor, as your investment performance would usually differ from the general market and the crowd.
In general, most successful investors usually display a healthy dose of contrarian thinking within their investment philosophy. Value investors usually have some form of “contrarianism” due to the fact that they are investing in areas that usually have seen poor market performance. Notable investors like David Dreman, Jim Rogers and Howard Marks are known to be contrarian investors.
Technical Strategies
Investors who employ technical-based strategies utilise technical analysis in order to make investment decisions. Technical analysis involves the rigorous analysis of historical prices of financial market securities to understand the collective behaviour of market participants with the objective of determining how prices would move in the future. This is done via the study of historical prices and volume data. Models and trading rules are employed based on the study of these data, often leading to patterns that can be observed and act upon. Terms like relative strength index, moving averages, regressions and oscillators are tools that technical analysts use.
Technical strategies can either be used by itself or complemented with other investment approaches or methodologies. Acclaimed investors who have been known to employ technical-based strategies include Ed Seykota, Martin Schwartz and John W. Henry II.
Momentum Investing
Momentum investors simply follow a strategy of investing in assets that have been performing well, and selling assets that are not performing well. Simply put, momentum investing aims to capitalise on the continuance of existing trends in the market. This strategy is also known as ‘Trend Following’. This strategy totally differs from contrarian investing (as explained above). Due to its opportunistic nature, momentum investors tend to employ technical analysis in order to find patterns and trends in the markets that they could capitalise on. Where value investors buy low and sell high, momentum investors buy high and sell higher.
The time horizon that momentum investors adopt usually differ between various practitioners, with some having very short-term holding periods (like high frequency trading) and others holding positions for months to even years. Eminent investors Richard Donchian and Richard Driehaus are proponents of this strategy.
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