March 3, 2017

How the Greats Trade Stocks

Let me explain how investment strategies turned people into great investors.

Long-term investment philosophy has been one of the significant contributors for the success of many investors across world. Most successful investors believe in investing money to get long-term benefits from the stock market. Paul Cabot’s State Street Research Investment Trust has been working with an objective to achieve long-term growth and income and capital. Similar approaches were adopted by many in options trading. People need to be cautious when choosing the right options trading strategies to get their expected return on their investments.

Philip Fisher believes that if a company starts distributing dividends to the shareholders, companies will be left with little funds for reinvestment - which will affect long-term growth. If the right stock is bought, you may not find an opportunity to sell it as you go on receiving benefits from it.

John Bogle says that data over the past century shows that US-based business enterprises have established a growth rate of 9.5 per cent with 5 per cent growth in their earnings. These realistic benchmark figures simply touch on mathematics and common sense. Hence, you need to gauge your expectations to those long-term figures - which requires discipline.

Benjamin Graham’s focus was always on timeliness which he thought was essential for success in the long-term. He says an intelligent value investor would maintain a long-term investment strategy. Cyclical transformations in the securities market will be overridden by a diversified portfolio over a stretch of time. The securities market seems like a voting machine where voters can do any silly thing they want; however, over the long term, the security market is like a weighing machine where real worth of companies put on scales.

Peter Lynch is a strong advocate of maintaining long-term commitment to the securities market. Although he doesn’t want to hold a particular stock forever, he says that investors should review their holdings periodically and find out facts relating to the company if anything has changed in the expectations or in the share price. Lynch builds a story before any stock is bought and checks it if it plays out as expected. He looks at a rotation approach to maintaining long-term commitment by continuously replacing the underperforming stocks with better performing stocks.

Sir John Templeton says that the true objective for any long-term investor is to maximize overall real earnings. Long-term results can be achieved by changing the types of securities you favor and the methods you adopt in picking stocks. His average holding period of stocks ranges six to seven years. According to him it requires patience in order to get long-term gains. He insists on being a bargain-hunter on a long-term fundamental basis and ignoring the short-term trends.

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How to Find Undervalued Stocks

It is a difficult task to find undervalued companies in stock investment strategies. Anyone will end up making money if they will be able to find such shares consistently.

Warren Buffett is one among that prominent exponent of value investing. He adopted a strategy where he had been seeking out and buying stocks of companies that have strong fundamentals and financial figures in order to make money in the stock market. Lower debt and higher return on equity are also good reasons to invest in shares that are out of favor in the market - if their price is below their intrinsic value.

Roger Montgomery, one of Buffett’s great adherents in the Australian market, bases his focus on long term investments and his process of selecting a company as his model of investment to make money on stock market. He did not favor widely-used valuation tools such as Capital Asset Pricing Model (CAPM), beta or Equity Market Risk Premium (EMRP). He is also dismissive of PE ratio being used to value shares.

He is of the opinion that PE ratio tells you about price and doesn’t provide anything about value of the stock - which is not dependent on price. The principle here is the price you pay versus the value you get. Prices of assets may be higher or lower than their values. It is better to buy when price falls below a determined value. Many other inputs can be used to determine the value including return on equity, debt level and dividend payout ratio. A check on competency of management is needed along with a check to find out if any money retained is creating equal amount of value addition to the share value.

It will be good to buy if all the above factors come up trumps and the share price is below the calculated value. These are pretty complex and intimidating but are required for successful investing.

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