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a weekly look at investment strategy for beginners
Useful information:
Nothing here constitutes investment advice, please consult a professional advisor, only risk what you can afford to lose.
Contrarian Investing
If you’ve
always considered yourself as a little apart from the crowd, a bit of an
oddball, then contrarian investment strategy may be for you. The basis of
the contrarian strategy is to do the opposite of what everyone else is
doing. So if oil stocks are out of fashion then you buy them, if tech
stocks are in fashion then you sell them. The principle is that the
markets work in economic cycles; at any particular point in the cycle some
industry sectors are doing better than others – at the start of a boom
for example building and construction. Contrarian investing is more often
applied to market sectors rather than individual stocks.
Fundamental analysis
Fundamental
analysis uses the basic accounting figures and ratios used by accountants
to value companies and compare their relative performance with their stock
price, and with their competitor’s performance. A full discussion here
is not possible but such ratios include Return On Investment (ROI), Cash
Flow per share, Earnings Per Share (EPS) and Price/Earnings (P/E) ratio.
The major drawback of fundamental analysis is that it relies on available
records of the previous years performance rather than the current
situation. Annual reports often provide only a basic summary of the
company’s accounts, which makes it difficult to see the real situation,
and there have been some high-profile cases of company accounts being
massaged to show them in the best light. Canny investors hope to find
companies with solid “fundamentals” and buy in the belief that
eventually the rest of the market will value the shares upwards.
Technical
analysis
Often
cited as the opposite of fundamental analysis technical analysis looks at
only the movements in the price of the share to try and determine future
share price performance. Within technical analysis there are many
competing indicators. Some people look for patterns in the price charts
that repeat themselves, others apply complex mathematics – nowadays all
done with computer software to spot shares on the up and up.
Dollar cost averaging
The idea of
dollar cost averaging is that rather than investing a lump some into a
stock or mutual fund in one go, you spread the investment over several
weeks or months. So if you have 6000 dollars (or any currency for that
matter) set aside for investing in a stock then investing 500 dollars
every month will even out market fluctuations in the year. If you invested
all 6000 in one lump some you could be investing at the top of the market
and your investment can only go downhill. If you invested 500 then while
you have still lost the same percentage of money your 500 dollars
investment next month is brought at the lower price. It is a way of trying
to smooth out risks inherent in investing in the stock market.
Buy and hold
As opposed to traders who intend to buy and sell a stock within a matter of days or even hours many investors cannot hope to make money on such a short term basis. For medium to long term investors a buy and hold strategy will provide a higher return. For example on the US markets since 1946 the average bull market has delivered returns of more than 135%, while the average bear market during that time declined about 19%. 135% average increase vs. a 19% average decrease. A compelling case for investing and waiting rather than trying to buy into a bull market and sell at the start of a bear market. Most professional investors can’t successfully do that, the average person has even less of a chance.
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