Other Theories
Arguably, there are as many investment strategies as there are investments. However, there are a few major categories in which these fall. Many investors buy big stocks with instant name recognition. Companies such as McDonald’s, Disney, Wal-Mart and Coca Cola fit this description exactly, since their products are commonplace on the American scene. Not coincidentally, these are all Dow stocks (discussed later). This approach is a good one to take if your time frame is more than a decade. For short term, far better approaches could be used.
In any case I would not be objective nor would it be fair if I did not highlight some of the other forms of investment theories that play a role in the mind of the trading world in general. I personally do not practice these methods though have found some of their items insightful on occasion. I personally follow the value investing method as I believe of all methods, I have seen it work out to be the most profitable, most thorough and least risky of all trading strategies. Here however are a list of a few others which you can follow the links and read for yourselves.
- Growth Investing (focuses on the future potential of a company and less about its current price).
- GARP Investing (Growth at a Reasonable Price, a combination of Value and Growth Investing).
- Income Investing (Focusing purely on the dividend payment a company makes each year).
- CANSLIM
- Dogs of the Dow
GARP is a popular strategy, GARP being an acronym for Growth At a Reasonable Price. Using GARP, major companies that have ‘room to grow’ would be selected. This is the theory behind Peter Lynch’s mutual funds. GARP is a rather safe tactic and is superb for beginning investors. The upside can be great and the downside is somewhat limited.
Momentum plays are also popular. When a stock jumps by a significant amount, investors tend to assume that the company will continue to perform in a similar fashion. However, such assumptions are not always correct. Momentum plays are quite risky and should primarily be attempted by experienced investors.
Another strategy is to invest in falling angels, or stocks that are far below their historic highs. For larger companies, this strategy tends to work well. In fact, this is the premise of the ‘Dogs of the Dow’ strategy, whereby an investor purchases shares in the worst-performing stocks among the Dow 30. Historically, most larger companies recover from these temporary slumps. However, smaller securities may not fare as well. In some cases, the stock never recovers and, in the worst case, it declares bankruptcy.
The final method is quite simple. Every year, pick the five stocks in the DJ 30 with the highest dividend yield. Buy them, hold on to them for a year, then do the same next year. The results have been amazing. In recent years, it has averaged a 35% increase annually!
Technical Analysis
Technical Analysis is the complete opposite of fundamental analysis and all the varying methods within fundamental analysis (including the list above). It focuses on the external features that affect a company’s share price and it often focuses on the short term, more volatile driven elements that occur in the price of a stock. Its emphasis is on using charts to determine momentum, market sentiment (Bull and Bear theories) and short term direction. It makes explicit use of a number of types of indicators in the company’s share price graph, looking for cycles, patterns and sentiment changes to determine the suitability of a trade. It pays no attention to the intrinsic information about a company which is why it usually accounts for only short term trades.
That covers the basics. It is now up to you to do what you think is best. I hope, after much thought, about what it actually involves to be a successful share trader, you may find your way in this complex, dog eat dog world that we call Stock Markets.
