By elmads

Investing, it is an endeavour to multiply our wealth overtime. We venture into this world in order for our money to work for us, instead of us working for money for a long time. What investors practice here is the power of compound interest, I have discussed this further in my blog titled “Simple and Compound Interest”. It is a phenomena that gives us wonders in our financial life, when done with discipline and consistency. Nevertheless, these returns does not come with hardships.

As an entrant into the world of investing, it is important to know the basic knowledge of it, as this will guide us to the uncertainties of this complex investing world. (I implore you to learn about this, I have blogs discussing the basics in my Investing Blog Section).

Moving forward, dipping our toes into the water is a good way to have our own exposure in this world, as long as we have the right basic amount of knowledge. I remember my the first time I invested in the market, that was way back in 2013. I only had a limited amount of information and knowledge about investing, which all came from my father and uncle. They advised me to place a certain amount of my money that I would not need for more than 10-20 years, and to always add a portion of my monthly salary regardless of the amount I am able to save. At first I was hesitant because that was the only thing that I know of, but then my uncle advised me to invest my money into the top companies in the Philippines, which I should know very well in the basis of what products and services I mostly pay for and purchase.

That time, it was BDO bank (One of the top banks), Meralco (Electric company giant), SMPH (Property company that is focused with maintaining and developing malls). Those where the two main principles I lived with and practiced for almost 6 years, and they actually did well for me. Nevertheless, the gains that I had was just pure luck because the information I had back then was miniscule in amount when compared to the knowledge I have learned afterwards.

That being said, I am here to pave the way and show you that investing has various strategies that we can choose from based on our own lifestyle and personality. I now present to you the strategies that we, as investors can employ in order to arrive into our own investing goals.

Buy-and-Hold, & Cost Averaging investing

Money grows overtime, Don’t Time the Market

This is one of the most popular methods utilized around the world. This has been one of the highly advised strategy for the novice investors, and to people who does not have the time to study and research the financial markets.

The essence of this strategy is to invest on an asset for a long period of time (usually at a minimum of 10 years) and just hold it, hence the buy-and-hold name. This was the strategy I utilized for 6 years before I expanded my knowledge about investing.

Additionally, this strategy is fully maximized with the dollar/pound/peso (depending in your country’s currency) cost averaging method, in which investors regularly invest money on an asset regardless of its price levels. As a point in case, let’s say we’ve invested 100 USD religiously per month on Apple stock starting on the 1^st of January 2018 up until December of 2019, see sample below.

As depicted, we invest regularly without giving any care on the volatility of the stock market price itself. This strategy averages out the ups and downs of the stock market price, that is why it is called dollar/pound/peso (depending in your country’s currency) cost averaging.

Advantage:

• This averaging strategy only becomes profitable in the long run that is why it is best used hand in hand with buy-and-hold method. With these two together the returns will be significant after more than a decade of investing.
• Easy to understand and implement
• Does not require deep learning about the company business and operations
• Removes the psychological biases in investing
• Excludes timing the market which most investors try to, but has always been impossible to do.

Disadvantage:

• Average investment returns
• Riskier to do with stocks (if you are not planning to understand the underlying company)
• Not for short-term capital appreciation

Furthermore, when doing this strategy in both stocks or bonds, we must also have the basic idea of the company’s business operations and their health in order to be sure that our capital investment will be safe. We certainly do not want to invest in declining stocks because there will be no returns for investors if the company we invest in will eventually go into bankruptcy.

On the flipside, if we really want to have less to no stress at all while utilizing this method, then the best investment we could take are index funds. I have discussed this in detail in my blog titled “Mutual Funds”.

In general, Buy-and-Hold with Dollar Cost Averaging, plus Index Fund investing will be the ultimate least knowledge and information needed by a person who wants to invest in the equities market.

Nonetheless, we must be realistic that with this strategy comes an average return of our investments in the long run (7%-9% annually), meaning we must not expect monstrous returns (More than 15% annually). Less work yields less return, whereas more work could yield more returns.

Dividend Investing

Money does really Grow in Trees

As the name suggests, this strategy focuses on the dividend returns of owning shares of a company.

It is a portion of a company’s earnings in a certain quarter or a year, which they distribute to their shareholders/stockholders. Companies do this to honour their shareholder’s trust to them and the company, and it also a way of maintaining investors to stay and hold the company’s shares.

Furthermore, companies who are well established in their industry and has extra cash that they would not need, often times issue a portion of their earnings to their investors. Such companies are usually found under the utility, oil and gas, basic materials, financial and pharmaceutical industries.

Investors who seek out dividend paying stocks have their own set of criteria before investing on it. The following below are the common standards they adhere to.

1.) The yield – This is where investors look for a specific dividend yield (this is the return on investment per year). This is computed by firstly knowing two factors, which are the current stock price and the total dividend per share for the current year. See example below.

The example above is Globe Telecom stock which is a company under the Telecommunications Industry in the Philippines. As indicated, the stock price as of this time of writing was 2,002.00 PHP per share, while the Dividend price per share for that year was 99.41 per share. Below is the computation for its dividend yield.

In conjunction, with bonds, it is computed by dividing the Coupon Payment to its Par/Face Value, I have discussed this further in my blog titled “Valuing Bonds”.

Whereas, in real estate rental investing, it is computed through Gross Rental Yield, by dividing the Annual Average Rental Payment to its Average Property Price bought, I gave a summary detail of this in my Real estate section of my blog titled “The 5 Basic Asset Classes”.

Furthermore, upon knowing the yield of an asset, dividend investors will now decide for themselves which one will they purchase and take as an investment. It’s up to the dividend investors to decide if 3% yield per year is enough for them or maybe they need 5%. We need to make own decisions based on our financial goals. Generally, most dividend investors aim for at least 5% in dividend yield per year.

In contrast, we also need to be aware that the dividend yields can increased and decrease when the stock prices changes. Again using Globe Telecom as an example, see example below.

2.) The company – when invested in dividend stocks, we need to understand the company and its profitability. Why is that? because dividends are a part of the company’s earnings. So, if a company is unprofitable and or have less earnings than previous years, then they might either decrease the amount of dividends that they will distributing to their investors or, not give any dividends at all. If this will be the case then the company will not be suitable for dividend investors at all.

One example was the recent pandemic, there were a lot of companies who held back in giving dividends to their stockholders most especially the Airlines sector. This is because there were less to no demand for travel flights, which caused a massive decline in income, to the extent of almost zero earnings generated for that year.

That being said, knowing and understanding the company’s financials (Income statement, balance sheet and cash flow statement) is important in here. The main reason is to know if the company we have invested or want to invest in, has a good track record in paying dividends, and if it has the capacity and consistency to pay dividends regularly even at good or bad economic times.

The essence of dividend investing is the consistency of the company to pay dividends to its shareholders. Some dividend investors prefer investing in companies who, not only pay dividends yearly, but are also increasing their dividend pay-outs yearly. One example is AT&T, a telecommunications company giant in the US which has been increasing their dividend pay-out to their shareholders every year since the 1980s.

Advantage:

• Regular income stream
• Can compound our investments significantly only when we reinvest the dividends we receive
• Will give us additional purchasing power, liquidity via dividends received
• We still gain dividends even in down markets (Still depends on the company’s board of directors & financials)
• Stock market price is not the focus. We only care about dividend yields, the company’s ability to pay dividends and if they increase their dividends yearly.

Disadvantage:

• We need to be knowledgeable about the company’s operations and profitability, in order to know the company’s sustainability to pay dividends regularly.
• Dividends are taxed every time they are paid to shareholders. The taxable amount depends in the country you live in and also the kind of investing account you have. This is because some countries have less to no tax for dividends and some investing accounts are shielded from dividend taxes. Namely, the 401k in the US, ISA/SIPP in the UK and PERA/Pagibig MP2 in the Philippines.

If you reside, living and working in the UK. I have discussed the non-taxable accounts in the said country, titled “UK’s Tax Exempted Individual Savings Account”

Growth Investing

Money Multiplies with Strong Growth Companies

This is an investment strategy which solely looks for companies that will grow massively and fast compared to other companies and the general market, henceforth the name growth investing.

In this strategy, investors need to have the knowledge to understand the financials and to do valuations of a business, because growth investors mostly focuses in the possibility of the company to grow exponentially based on a company’s business operations, revenues, investments, innovations and industry.

The Company – It is finding the next big things like technological innovations and disruptive inventions. Such companies are considered growing because of the possible future earnings of a ground breaking technological advancements that could change everyone’s lives in the long run. For instance, Electronic vehicles, blockchain technology, electronic commerce, space travel, AI technology and nanotechnology.

Earnings – Investors base the growth in a company’s earnings. Growth companies have in average, earnings of 20% or more year on year. That is why growth investors keep in tabs with the quarterly and yearly earnings to see if their forecasted estimated growth is near accurate or not.

Advantage:

• High return on our investments
• Investors invest in new technologies that could improve human lives
• We gain more knowledge about the companies and industries that are mostly related to disruptive new innovation technologies.

Disadvantage:

• High Valuations – investors are willing to pay more than the main value of the company, even if the company is currently unprofitable. The reason behind, it is because they are investing for the possible future profitability and growth of the company. For instance, Tesla motors in the US, investors price this company at a market capitalization of 810 billion USD, while their current net income for the year 2020 is 690 million USD. It just signifies that Tesla Investors see the company to reach 810 billion in earnings, probably after a few years or a decade.
• No dividends – yes, most growth companies do not pay dividends. This is because growth companies mostly reinvest all of the company’s earning back to the company. This is to grow the company exponentially and to continue to reinvest it for innovations, technology and company expansion.
• High volatility – price fluctuates a lot with growth stocks because of the fact that investors invest in it for the future. When problems with growth companies arise, like if they are not able to meet the investors quarterly or yearly expectations, then these factors could drive the stock price into a sharp or gradual decline. On the flipside, if the growth company has beaten the investors earnings expectations and/or substantially improved like newer products and services, then this could significantly boost their stock market price.
• We need to study, research and monitor the company’s financials to make sure that the company is growing based on our own valuations. We also need the Knowledge about basic accounting, to understand what the financials of the company says.

Value Investing

Money Massively Grows with Mispriced, Strong and Fundamentally Sound Companies

It is finding companies that are trading below their actual value. Investors that utilize this strategy can also be called bargain hunters. Value investing is finding the diamond in the rough, they grab the opportunity for prices that are lower than it should be and waiting for it to appreciate once the market sees its true value.

Value investors focus most of their time on the underlying business of the company, because that is where they find its fair price depending on their historical, current and future predicted financials.

They utilize 4 simple and summarized steps, which are the following

• Company should have good management (debt managing, liquidity and capital allocation)
• Long-term sustainability (Will the company still be operating for more than a decade and will they have a durable competitive advantage?)
• Good operations and growth (is the company growing, stagnating, declining or will bounce back from decline?)
• And buy below intrinsic value (we do not pay more than the computed value of the company, which depends on our own valuations)

They see the shares of a company not for as stock prices but as a real part ownership of a corporation. This is why it is called value, they look for the essence and underlying value of the company. They invest in unpopular companies that most investors sell or do not buy because of certain headwinds, but does not have any significant impact into the financial standings and business of the company. Typical bargain hunters.

Value investing also practices buy-and-hold strategy because these investors, just like what I have said, see stocks as an ownership of a company. As like what Charlie Munger quoted;

“You shouldn’t be buying stocks that you might need to sell in the first place.”

Charlie munger

Advantage:

• Strong investment returns
• We gain more knowledge about the companies and industries
• Practices Patience
• Leverages on stock price volatility
• Dividends – most undervalued companies have high dividend yields due to its low stock price. (this is only a feature and not the main focus of value investing)

Disadvantage:

• A lot of studying and research that needs to be done. We need the Knowledge about basic accounting.
• Patience – as it takes time to find bargain prices, this will be hard for impatient people
• Stores a lot of cash, if there are no companies that are trading at a bargain price
• A boring strategy for some

The Value Investing strategy I shared here was the known to everyone approach, but the real value investing encompasses all fundamental investing strategy (Growth, Dividend, Buy & Hold, Growth at a reasonable price and more). As like what the well known value investor of this generation, Charlie Munger said, “All intelligent investing is value investing – acquiring more than you are paying for. You must value the business in order to value the stock.”

I’ve discussed the real value investing in my blogs titled “A Short History of Value Investing” & “The School of Value Investing”

TABLE SUMMARY OF THE STRATEGIES

To Sum It Up

Strategies are formed as a plan of action to attain our own long-term aims. There is no one specific method that is perfect and without risk. Each and one of them have their own advantages and disadvantages, what we need to find is the the one strategy that will be applicable to our own lifestyle, personality and financial goals.

In addition, if you are a novice investor you first dip your toes into the water. To experience investing in a first hand manner and by trying each and every strategy in order to know what works for you. The goal of investing not just multiply our hard-earned money based on our financial goals but also to mitigate the risk of a complete capital loss.

• If you do not have time to learn intensively about it, then buy-and-hold cost averaging might be the right one for you.
• Or, if you have time to learn the basics, understand the company and wants a steady flow of income, then dividend investing might be for you.
• Additionally, if you probably have a superb patience built in with you and is willing to learn about the company and have an owner’s mindset, then value investing would be a perfect match with your personality.
• But, if you live and breathe the excitement of life, loves disruptive technological advancements and is willing to learn about more about the company then Growth investing might be suitable for you.

What I have said on the previous four are not black or white, we can mix everything all together. What matters is you find which one will jive with your own being.

I end my blog with the quote about strategy from Henry Mintzberg, a business and management author.

“Strategy is not the consequence of planning, but the opposite: its starting point”

-Henry Mintzberg

Knowledge is my Sword and Patience is my Shield,

elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.