| John Spacey, October 09, 2016 updated on March 12, 2021
Investing strategy is an approach to putting capital to work to earn a return. The following are investing strategies from the perspective of behavioral investing. In other words, these are strategies used by retail investors in the real world.
Wealth PreservationWealth preservation is a term for investors who are conservative such that their primary goal is not to loose money on an inflation adjusted basis. For example, a family that seeks to preserve wealth for many generations. This calls for safe investments that can beat real inflation. For example, inflation-linked bonds issued by a large government with a stable currency.
Paradoxically, when 'dumb' money acknowledges its limitations, it ceases to be dumb.Investing in passive funds such as an ETF with low fees that tracks a well established index. Stocks and other investments are efficiently priced in a liquid market such that outperforming the market on a sustained basis is extremely difficult. Investors who choose passive investing accept this reality and benefit from low fees.
~ Warren Buffet, 1993
Buy & HoldInvestors with high conviction who are able to hold an investment for many years or decades without being overly concerned with Mr. Market. This can remove a large number of costs and can be extremely efficient. Investors who can hold an investment through bad news and good, price declines and increases can fully participate in its long term prospects.
Portfolio InvestingDistributing your investments in some balanced way that aligns to your goals. For example, a young investor who buys all growth funds early in their career who shifts to a more stable mix of growth, value and bonds as they approach a stage in their life when they might need their money. This is generally intended to reduce risks by diversifying into multiple asset types.
AlphaAlpha is a return that exceeds that of a benchmark such as a stock index. The efficient market hypothesis predicts that a liquid market is so competitive that prices perfectly reflect the likely future returns of all investments. This predicts that those who outperform the market simply get lucky or take on more risk. Either way, their returns would be likely to regress toward the mean. It is remarkable that most investing strategy pursues alpha when a reasonable hypothesis suggests this is mostly impossible.
Active FundsInvesting in funds that are actively managed, meaning that they are invested according to the judgement of a portfolio manager, often with some overall goals or constraints. These tend to have higher fees as compared to passive funds. They also may require a more intensive selection and monitoring process.
When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.Investing in funds, such as hedge funds, that charge relatively high fees that may include a percentage of net asset value and a performance fee on any investment gains in a period. Warren Buffet famously referred to this as the "2-and-20 crowd" whereby funds charge 2% of net asset value plus 20% of any gains.
~ Warren Buffet, Annual Shareholder Letter, 2017
ContrariansContrarians are investors who believe they see errors in the market such as an underappreciated company or mispriced stock. Investment analysis is extremely complex. In some cases, an investor who feels that everyone else is wrong is simply missing something that the professionals catch.
Emotion TradersBuying out of a fear of missing out and selling out of fear. This would appear to automatically translate to buy high, sell low.
Dip BuyersDoubling down on a position by purchasing more every time it falls. This can be quite tragic where an investment falls for an extended period of time such that an individual may repeatedly increase their investment in a failing position. This is known as "catching a falling knife."
Income MaximizersThe pursuit of high dividends no matter how bleak the prospects and balance sheet of the underlying investment.
Growth MaximizersThe pursuit of firms that are growing quickly no matter the price or viability of the firm's business model.
Metric MaximizersInvestors who have a favorite metric with which to evaluate investments. For example, an investor who purchases stocks with a high price-to-earnings ratio without regard to other factors such as debt.
Buy What You KnowInvestors who buy firms because they like their products or services without regard to price or the financials of the firm.
Noise TradingIt is common for financial models to assume that retail traders act in a more or less random fashion. This is known as noise trading. For example, an individual who trades a stock based on some misinformation, disinformation or hyperbole they happen to find on the internet.
SpeculationSpeculation is a purchase based on your predictions or feelings about future prices without any concern regarding the intrinsic value of your investment. This isn't necessarily considered investing as it doesn't necessarily put any capital to work to create value.
[charts] are great for predicting the past.Speculation based on supposed patterns in price history. This is quite popular such that it may become a self-fulfilling prophecy from time to time. In this case, it would be a zero-sum game at best.
~ Peter Lynch
NotesThe efficient market hypothesis assumes that markets are efficient. For example, it doesn't account for information advantages.The list above illustrates the behavior of investors and isn't a list of recommended strategies.
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