There are various strategies that are employed by investors who try to strike a balance between maximizing their profits from their portfolio and risk they are willing to take. Investment strategies like Value Investing Strategy, Growth Investing Strategy and Dollar Cost Averaging Strategy are set of rules that guides investors in selecting shares to include in their portfolio.
We shall look at these strategies and see if which of them can help in you in your investing career.
Value Investing Strategy
The Value Investing strategy looks at the intrinsic value of a company and value investors seek stocks of companies that they believed are undervalued. Market prices of shares reacts to news, moving up on good news and down on bad ones. Value investors believed that the price movements do not correspond to the long-term fundaments of the company.
Value investing strategy forms the backbone to the investment strategies used by Warren Buffett and Benjamin Graham. Both of them are bargain hunters where they will look for stocks that are currently being undervalued by the market.
There are many ways that value investors use to find out the intrinsic value of the company. Some will look at the company’s financial statements, especially looking out for its revenue, net profits, cash flow, etc., while some uses formulae to derive the intrinsic value. Because of that, given the same set of information to two investors will yield two totally different intrinsic value of the company.
As intrinsic value of a company is very subjective, value investing uses a “margin of safety” concept where the investor will only buy if the share price of a company is currently at a discount of its intrinsic value, big enough to allow room for error in the estimation of the intrinsic value.
Growth Investing Strategy
Growth investment strategy looks at the growth potential of a company and when a company that has expected earning growth that is higher than companies in the same industry or the market as a whole, it will attract the growth investors who are seeking to maximize their capital gain.
Unlike value investors, growth investors try to find companies that have high future potential growth and do not take as much emphasis in the current price of the company. Growth investors believe that the intrinsic value of the company will grow and eventually exceed their current valuation.
To evaluate the potential growth of a company, growth investors look at financial ratios like Earnings per Share (EPS), Return on Equity (ROE), Price/Earning Ratio (PER), etc. and compare with companies in the same industry or sector.
The main guiding principle of a growth investing strategy is to find a company that is constantly reinvesting in themselves to come out with new products and technology so as to out-grow their competitors.
Dollar Cost Averaging Strategy
The Dollar Cost Averaging strategy is aimed at reducing the risk of incurring substantial losses resulted when the entire principal sum is invested just before the market falls. The strategy simply divides the total principal (e.g. $100,000) to be invested in the market into equal amounts and invests at regular intervals (e.g. $10,000 over 10 months).
Investor A and Investor B has got a total of $100,000 to invest and in June 2013, both have decided to invest their money in Vard (SGX: MS7). A decides to invest all that he has on 3rd June while B goes for the dollar cost averaging strategy, dividing his total investment principal sum into 10 portions, investing each portion at the start of every month.
Using a simple way of calculation where both investors bought shares at the closing price and without considering cost of commission and dividends payout, we can easily work out the total investments made by both investors and the total profit and loss each investors have based on closing price on 19th June 2014.
|Date||Price||Investor A||Investor B|
|Lot Size||Total Cost||Lot Size||Total Cost|
On 19th June 2014, around 1 year after both Investor A and Investor B started their investment, Vard share price closed at $1.15. Investor A invested a total of $99,760 with a total of 86,000 shares, his investment lost $860. On the other hand, Investor B invested a total of $98,675 with a total of 112,000 shares, investing with lesser amount but holding more shares than Investor A. Investor B’s investment profit earned him $30,125.
This seems to be a good strategy as it helps Investor B gotten more profits as compared to Investor A. However, if both investors started the same strategies two months later, Investor A would have gotten more profits than Investor B.
Although the dollar cost averaging strategy does not provide the maximum potential profits in investing, it does downsize the risk of the investor.
What is the Best Strategy?
In terms of risks involved in the various strategies mentioned, the dollar cost averaging strategy is undoubtedly the least risky strategy of the three, followed by the value investing strategy. Growth investing strategy has the highest risks among the three strategies discussed. Although with high risks involved for growth strategy, it has the potential to bring the most returns. A high-risk strategy will undoubtedly bring higher returns compared to a low-risk strategy.
Different strategy suits different people, depending on their risk appetite and goals, employing the correct strategy will give you the best return of investments. No matter which strategy or group of strategies you choose to employ, one important point to remember is, choose what is suitable for you and do not try to find the holy grail in investing strategy.