Most active investors want to stamp their own personality on their investing strategy, tailoring their tactics to suit the individual. This might be growth or income, a bit of both, higher risk or belt and braces, overseas stocks or companies in your own backyard.
But there are several common and simple investment styles and tactics that can help you bridge the gap from stock market wheeler dealer to successful investor.
In this mini-series we are going to look at four basic ways to invest. Today we kick off by looking at value investing, finding those attractively valued stocks being overlooked by most of the market.
In the coming days we will also take a look at the contrarian, momentum and GARP, or growth at a reasonable price.
BARGAIN HUNTING
Value investment is all about spotting shares that are being unfairly discounted, or ignored altogether, by the market.
The idea is that you buy the stock while it's going cheap in the hope that others will eventually recognise the stock's underlying attractions are follow you in, sending the shares shooting higher and making you a tidy profit.
Why would a stock be undervalued? There could any, or all, of several reasons; perhaps the company is little-known, or is operating in an unfashionable industry, or that its business model or management team are unproven.
TOOL KIT FOR VALUE SPOTTING
So how do you spot a bargain? Take a long hard look at the company's fundamentals and several of the key ratios; the price to earnings (PE) multiple, price to earnings growth (PEG) ratio, price-to-book value, and dividend growth and yield, for example.
We looked at the PE, PEG and book value ratios recently, click through, they are free to read. There's also a feature here about how manage your portfolio.
If the company looks genuinely undervalued still, the attractions are likely to jump out. That said, do your homework, it is worth remembering that some companies are discounted for a good reason.
One of the main benefits of value investing is that it is relatively low-risk. Because a stock is already trading at a discount, the downside will be pretty limited but the upside could be significant.
On the downside, however, it can take a lot of time and effort to unearth good, undervalued plays. But if you're willing to put in the work, the rewards can be spectacular.
