Which investing style do you use in your portfolio? Better yet, do you know why?
With so many of us new to investing over the last few years and with the over-saturation of investment advice, I wanted to provide my fellow investors with a framework to understand the 3 OG investing styles. Note: this does not include momentum, FOMO, or any of the newer styles which have become in vogue.
**Value Investing **
This style seeks to invest in “undervalued” areas of the market, which can center on specific companies, certain industries, or even geographic regions. The buy/sell decision usually hinges on quantitative analysis (typically derived from backward-looking data) to determine if a company is undervalued. The analysis typically comprises a company’s financial metrics (price-to-earnings, earnings per share, EBITDA, etc) relative to competitors or to the overall market. A myriad of studies conclude that proper value investing provides an investor with the highest probability of long-term investment outperformance (think 10-15 or more years)
**Growth Style Investing **
This style in many ways is the opposite of value investing, as it seeks to invest in companies or industries with strong potential for growth based on future projections and qualitative analysis. Generally, growth-oriented these companies are seen as “overpriced” based on their current financial metrics. Some of the most popular growth companies in recent years are Tesla and Amazon. Do you hold these in your portfolio?
This strategy is also known as ‘sector rotation’ and ‘economic forecasting.’ This style seeks to regularly shift the companies you own based on forecasts about the economy. The thinking behind this strategy is that you sell down the industries you expect to lag and then buy the industries you expect to outperform, over a certain period. Historically, this strategy provides investors a relatively lower probability of long-term outperformance of the market, primarily due to the difficult nature of consistently providing accurate forecasts (the economy is complex, with numerous variables and there are often sizable events which could not be predicted). A good example of this is January 2020 – who could have predicted the ensuing COVID-19 pandemic and its effect on sectors like biotech, commercial real estate, hospitality & leisure?
Which investing style do you use in your portfolio?
I/we have no positions in any asset mentioned, and no plans to initiate any positions for the next 7 days