Survey of Stock Investment Strategies

This article offers a brief survey of several strategies that investors use to guide their stock purchases and sales.

Before we start the survey, here's a golden rule of investing: Know why you are buying a particular stock -- don’t wait until its price goes up or down to think about it. Many investors are not sure why they bought a stock in the first place, so when a dramatic fall in price happens, they're not sure what to do next.

Here's an example. Let's say you bought Intel. When you know why you bought Intel you will have a stronger basis for knowing what to do when its price goes up, or down, or even stays the same. So if Intel starts to go down in price and you bought it as a momentum play, then you will probably want to sell as quickly as possible. But if you bought it as an undervalued stock, and if the fundamentals have not changed, then you might want to buy more."

Of course, every investor and every stock presents a different reason for contacting your broker. But we have to start somewhere, so here is my analysis of the six main investment styles.

Brother-in-law investor

Your brother-in-law phones, or perhaps your stockbroker or the investment writer for the regional newspaper. He has the scoop on a great stock but you will have to act quickly. If you are likely to buy in this situation, then you are a "brother-in-law investor." Brother-in-law investors rely on the advice of other people to make their decisions.

Technical investor

Moving averages, candlestick patterns, Gann charts and resistance levels are the sort of things the technical investor deals with. Technical investors were once called chartists because their central activity was making and studying charts of stock prices. Nowadays this is usually done on a computer where advanced mathematics combines with grunt power to unlock past patterns and correlations. The hope is that they will carry into the future.

Economist investor

This type of investor bases his decisions on forecasts of economic parameters. A typical statement is "The dollar will strengthen over the next six months, unemployment will decrease, interest rates will climb -- a great time to get into bank stocks." Random walk investor This is the area of the academic investor and is part of what is called Modern Portfolio Theory. "I have no idea whether stock XYZ will go up or down, but it has a high beta. Since I don’t mind the risk, I’ll buy it since I will, on the average, be compensated for this risk." At the core of this strategy is the Efficient Market Hypothesis EMH. There are a number of versions of it but they all end up at the same point: the current price of a stock is what you should buy, or sell, it for. This is the fair price and no amount of analysis will enable you to do any better, says the EMH. With the Efficient Market Hypothesis, stock prices are assumed to follow paths that can be described by tosses of a coin.

Scuttlebutt investor This approach to investing was pioneered by Philip Fisher and consists of piecing together information on companies obtained informally through wide-ranging conversations, interviews, press-reports and, simply, gossip. In his book Common Stocks and Uncommon Profits, Fisher wrote:

Go to five companies in an industry, ask each of them intelligent questions about the points of strength and weakness of the other four, and nine times out of ten a surprisingly detailed and accurate picture of all five will emerge.

Fisher also suggests that useful information can be obtained from vendors, customers, research scientists and executives of trade associations.