Here are the three main investing styles favoured by Foolish investors.
The investment strategy favoured by the majority of our readers is fundamental investing. It's what makes sense to us, and we have many prominent role models to learn from.
Fundamental investing involves looking into a company: its debt, cash flow, the bottom line, the management, future prospects, and so on. Then we estimate its value and compare that to the current share price. If the price looks too low, we might buy.
Fundamental investing can normally be broken down into three popular strategies: value investing, growth investing and income investing.
Value investing
Of the three veins of fundamental investing, value investing is arguably the most popular among Fool readers. Value investors are simply looking for undervalued companies. If the company was to be sold tomorrow, what would it fetch? If the share price is lower than this, a value investor is interested.
Whilst some value investors prefer to buy solid businesses, others will buy almost any old company. It doesn't really matter; so long as the investor calculates that the share price is lower than the value of the company, then it is a value investment.
You sell when the price no longer reflects the fundamentals, whether that's because the price has risen too far (what a shame!) or the company's prospects have plummeted.
Growth investing
I get the general impression that growth investing has shrunk a little in popularity over recent years. Indeed, a Duelling Fools feature we did a few months back resulted in a narrow victory for the value crowd.
Growth investing is looking for businesses that you think are likely to grow their profits considerably year after year, usually with the intention of holding the company for quite a while. So the profit you make is primarily due to the growth of the business over time. This compares with value investors, who are primarily looking for shares that have been mispriced in the short term.
There is inevitably some overlap between these strategies, because a value investor looks at the future earnings prospects of a company too and will usually consider at least some growth to be important.
Conversely, growth investors won't buy at any price and might sell quickly if the price shoots passed their wildest expectations. However, the attitude and focus of the two sorts of investor is typically distinctly different.
Income investing
Value and growth can be thought of as distant cousins. Value investing and income investing, however, are more like siblings.
Income investing is looking for high- or relatively high-yielding shares. These are shares that pay good dividends in comparison to their share price. For example, if a share priced at 100p pays an annual dividend of 5p, that's a yield of 5%.
In addition to looking for a large initial yield, many income investors are looking for a dividend that will grow steadily over time. Pure income investors tend to be far less worried about what happens to the share price of the companies they invest in, so long as they continue to pay a high and increasing level of dividends.
Income investors might take the income to use or spend elsewhere, or reinvest some or all of it back into the shares.
Dividends are, in a sense, an alternative to growth. A business can choose to reinvest excess profits in the business to boost growth, or it may consider there's greater value in paying more money to shareholders as dividends.
Mix and match
Some people take bits of each of these three strategies. That's fine and can work very well. You need to experiment a little to find out which approach suits you best. Sometimes, for quite long periods of time, one of these strategies will be more profitable than others. Growth was all the rage ten years ago. After that, it was value's turn to shine.
You also need a considerable of discipline. If you find yourself veering wildly from one strategy to another, or even picking shares with no real strategy at all, that's when you can get into trouble.
So stick to your fundamentals to stay ahead, because remember: 'fundament' has two meanings!
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