Art of Successful Investing- Philosophies of Investing
Investing is simple, but not easy
Most of us understand the simple truths of investing. Haven't we been told not to hold on to losing positions for too long, or told not to panic and sell when the market corrects 10% in a single day? Although the basic rules of investing are simple enough to understand, following them can be quite tough. In the words of Warren Buffet, "Investing is simple, but not easy."
Investors get carried away by short term fluctuations and do not consider the fact that in the long run equity will go up and give good returns. They enter just before the top of the trend and get out near the bottom thus destroying their investments. This makes many people to think equity and risky and stay away.
After looking at how to analyze the stocks we now understand how to apply this analysis technique while making investment decision. Out of many investing philosophy three are Contrarian, Growth & Value investing
# 1. Contrarian Investing
This investment philosophy is about doing opposite to what a herd of people will do. In this philosophy when the people in market are in a bearish mode the contrarian investor will buy stocks which are not very famous in the market and sell the same stocks when the market is in the buying mode or bullish trend. It is like buying sweaters for cheaper rates during summer and selling them in winter at a higher rate.
Contrarian investing is a type of investment strategy distinguished by buying and selling against the investor sentiment during a specific time. A contrarian investor enters the market when others are feeling negative about it and the value is lower than its intrinsic value. When there is a more than necessary negative sentiment on a stock, it has the possibility of lowering the price so low, the downfalls and risks of the company's stock are unrealistic. Figuring out which distressed stocks to buy and selling them once the company recovers boosts the stock value and is the major play for contrarian investors. This can lead to securities returning gains much higher than usual.
Overly high valuations can lead to eventual drops when investors' expectations do not work out. Here the contrarian investor would sell and the market price is too high when compared to its intrinsic value.
Contrarian investment philosophy is about doing opposite to what a herd of people will do. In this philosophy when the people in market are in a bearish mode the contrarian investor will buy stocks which are not very famous in the market and sell the same stocks when the market is in the buying mode or bullish trend
# 2. Growth Investing
Growth investing is an investment style and investment strategy that is focused on the growth of an investor's capital. Those who follow the growth investing style - growth investors - typically invest in growth stocks or companies whose earnings are expected to grow at an above-average rate compared to its industry or the overall market.
The best way to define growth investing is to contrast it to value investing. Value investors are strictly concerned with the here and now; they look for stocks that, at this moment, are trading for less than their apparent worth. Growth investors, on the other hand, focus on the future potential of a company, with much less emphasis on its present price. Unlike value investors, growth investors buy companies that are trading higher than their current intrinsic worth - but this is done with the belief that the companies' intrinsic worth will grow and therefore exceed their current valuations.
As the name suggests, growth stocks are companies that grow substantially faster than others. Growth investors are therefore primarily concerned with young companies. The theory is that growth in earnings and/or revenues will directly reflect into an increase in the stock price. Typically a growth investor looks for investments in rapidly expanding industries especially those related to new technology. Profits are realized through capital gains and not dividends as nearly all growth companies reinvest their earnings and do not pay a dividend.
Growth investing is an investment style and investment strategy that is focused on the growth of an investor's capital
# 3. Value investing
Value investing is investing in fundamentally strong companies or stocks at low value or price. Here the investor invests his money for a longer time horizon. In value investing growth potential of a company & price or the value at which the stock is available in the market compared to other companies in the same business is emphasized on.
Eg. If stock of A company has a potential to grow at 15% and is available at Rs.150 with a P/E value of 10x and other stock of company B has a potential of growth at 15% and is available at Rs.200 and P/E value is 15x then a value investor will invest in company A’s stock cause it has growth potential as well as it is available at a cheaper value.
Value investing is investing in fundamentally strong companies or stocks at low value or price. Here the investor invests his money for a longer time horizon. In value investing growth potential of a company & price or the value at which the stock is available in the market compared to other companies in the same business is emphasized on
Margin of safety is the difference between a stocks fair value per share & its current market price. Higher the margin of safety better is the stock’s strength to stand the market downturns. Margin of safety gives cushion in case the investor makes any error in calculating fair value of a stock. Eg. If a stocks fair value is calculated as Rs.1000 and you purchase the stock for Rs.600; even if the stock’s actual fair value is Rs.800 you still make decent returns from the investment.
- Well informed and calculated investment should be the way and Emotional investment should be avoided.
- Value investing helps in identifying stocks and assets at low prices as compared to the value they offer. Such opportunities must be taken up as an investor.
- Contrarian Investment Philosophy helps investors in not following the herd and helps in getting an opportunity to invest which others cannot see due to a panic or over optimist outlook.
- Growth Investing focuses on investing in above average growth rate companies and staying invested for long term is the key.
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