stock investment strategies

Stock investment strategies continued...

Value Investor

In the fourth edition of the investment classic _Security Analysis_, the authors Benjamin Graham, David Dodd, and Sydney Cottle speak of the "attempts to value a stock independently of its current market price". This independent value has many names such as `intrinsic value,’ `investment value,’ `reasonable value,’ `fair value,’ and `appraised value.’ They go on to say:

A general definition of intrinsic value would be "that value which is justified by the facts, e.g., assets, earnings, dividends, [and] definite prospects, including the factor of management." The primary objective in using the adjective "intrinsic" is to emphasize the distinction between value and current market price, but not to invest this "value" with an aura of permanence.

Value investing is the name given to the method of deciding on individual investments on the basis of their intrinsic value as contrasted with their market price.

This, however, is not the standard definition. Most authors refer to value investing as the process of searching for stocks with attributes such as a low ratio of price to book value or a low price-earnings ratio. In contrast, stocks with high price to book value or a high price-earnings ratio are called growth stocks. Investors searching for stocks from within this universe of stocks are called growth investors. These two approaches are usually seen to be in opposition.

Not so, declared Warren Buffett. In the 1992 Annual Report of Berkshire Hathaway he wrote, "the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive."

Conscious Investor

This type of investor overlaps the six types just mentioned. Increasingly investors are respecting their own beliefs and values when making investment decisions. For many, quarterly earnings are no longer enough. For example, so many people are investing in socially responsible mutual funds that the total investment is now over one trillion dollars. Many others are following their own paths to clarify their investment values and act on them. The process of bringing as much honesty as possible into investment decisions we call conscious investing.

Most people invest for different reasons at different times. Also they don’t fall neatly into a single category. In 1969 Buffett described himself as 85 percent Benjamin Graham [Value] and 15 percent Fisher [Scuttlebutt].

Whatever approach, or approaches, you take, the most important thing is know why you bought a particular stock. If you bought a stock on the recommendation of your neighbor, be happy about it and recognize that this is why you bought it. Then you will be more likely to avoid the "investor imperative," namely the following behavior: If your stock rises, claim it as your ability; if it falls, pass on the blame.

Do all that you can to avoid going down this path. Write down why you bought a stock. Tell your spouse your reasons. Tape them on your bathroom mirror. Above all, if you want to be a successful investor, don’t kid yourself.