Level: Beginner
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Investing is a complex process, especially in today’s modern and fast-paced changing market conditions. In this article, we will enlighten you about the 5 fundamental principles and styles of investing and the ability to make the right choices.
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Investing with the right approach can also be fruitful. Today the market is vast and offers a plethora of assets to invest in. The availability of various assets has led to confusion about the best.
So, what is the most challenging part? It is the first step towards investing. Before you start, you must try to understand a few essential principles for investing and its core styles.
Investing, unlike trading, is a long-term project requiring more in-depth analysis and knowledge. Several famous investors like Warren Buffet, Benjamin Graham, Rakesh Jhunjhunwala, George Soros, and more whose theories and principles are what you can read and learn. The aim is to know how and why to invest, especially when the market is volatile and frequently shifts patterns. But one common thing in all well-known investors is their unique investment philosophy.
So, let us start our journey toward learning to invest.
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The five fundamental principles
These five tested fundamental principles can help you build an effective long-term investing strategy. Against the backdrop, always keep in mind your financial goal. These fundamentals have been curated out of the principles followed by top investors worldwide.
The First Principle: Get Started Early with the Analysis
The first and most important principle is to start as early as possible but only by conducting a thorough analysis. Investing is risky, especially for those who invest without knowledge and research. It is easy to move behind the crowd, and you may earn some funds in the short term. But remember, investing is a long-term action plan, so you must start and be patient to get something.
The market is volatile, and what is growing today may fall suddenly tomorrow. An in-depth analysis of the company’s profile and stock history may help you in your journey to achieve your financial goals. Remember to consistently evaluate your investment and spread your portfolio to mitigate risks as far as possible.
The Second Principle: Be Patient – Act, but Don’t React
Investment is made for the long term. Hence, on the way, there will be a lot of ups and downs. Today’s market fluctuates on every news, but we are not supposed to react. Think wisely, have patience, and then decide on the right course. Your financial goal is significant, which may take some time to fructify. Your task as an investor is to buy and hold the stocks.
Benjamin Graham, a famous investor, once said: “In the short run, the market acts like a voting machine, but in the long run, it behaves like a Weighing Machine”. So, the more patiently you wait for the stocks to grow, the more chances you have of reaching your financial goals.
The Third Principle: Stock Price Holds Value
The analysis of a company shows the true potential of its possible growth. The expected growth determines the likely stock price. Hence while buying stocks, consider this important benchmark. If you overpay for stocks, there is less likelihood of higher profits.
Your aim should be to find a company with excellent growth potential and buy the stock at the minimum possible price. Only then may you gain a profit in the long term.
The Fourth Principle: Time vs. Timing
You must always look for the opportune time to buy or sell on time. You should be ready to take a loss or lesser profit margin when the market shows a downtrend. However, you must be the master of patience, who waits and holds the stocks for the long term.
Your ultimate goal is to maximize the profit margin. A well-diversified portfolio held for a long time will likely yield better profits than short-term reactionary trading.
The market analysis over a decade reveals that the loss due to missing high-pitched market days is only half of what is holding the stock yields. Thus, hold your horses if you have the time to wait until the right moment comes and significant margins are available.
The Fifth Principle: Avoid Following the Crowd
Investing is a thoughtful action. You need to study the market, analyze companies, predict future market movements, and take a bold step toward investing. Famous investors always advise that one should avoid following the crowd. Be unafraid to make a well-researched decision to buy without fear. When the markets are down, you will find everyone selling, but good investors will buy based on their analysis of the stock and the company. They are ready to wait for the market to improve.
The above principles clearly show how to build a well-researched and diversified portfolio and aim to achieve financial goals through patience and holding stocks for a long period. Having seen the 5 fundamental principles, let us now understand the investing styles used by famous investors.
Investment styles to choose from
The investment journey is a long process and starts with understanding the principles and then applying them to form your strategy. Investment styles, to a great extent, lead to individual ones.
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These investment styles are classified under Active vs. Passive management, Growth vs. Value investing, and Small-cap vs. Large-cap companies. There are varied investment styles that you can choose from. Let’s see a few of the most used ones.
Growth-based Investing
Investors concerned about a particular company’s growth choose to favor this style. Fast-growing companies usually have a sudden and significant rise in their stock price. This kind of investor looks for firms with high earnings growth rates, high return on equity, and high-profit margins but low dividend yields. Usually, these companies are trend breakers and innovators in a new field. That is why they tend to give lesser dividends and choose to invest their maximum earnings. In the long run, they prove to be beneficial for investing.
Value-based Investing
The style revolves around looking for an undervalued stock compared to the company’s overall profile. Due to some jerk action of investors based on news or maybe even due to lack of knowledge, the prices of these stocks are lower and are available at favorable prices. Investors with this strategy need to show a lot of patience as they go against the common belief in the market. The returns may take some time to reap in.
Quality-based Investing
As the word suggests, this style looks for companies with outstanding quality characteristics. These companies have a niche in their field. They have greater credibility regarding their management or stability in their balance sheets. This investing strategy aims to look for strong and healthy companies that have shown their strength in the market or the potential to withstand the withering of time. They are suitable for investors looking for stability.
Income-based Investing
The focus of this style of investing is on the income generated by the company. They look for consistency in issuing significant dividends. The idea is to earn over a long period. The reliance for investment here is on large and matured industries with huge cash-generation potential.
Theme-based Investing
The idea is to find a connection between sectors. Their mutual dependence based on a theme shows better chances of growth. These industries support each other in times of crisis and thus have a better chance of consistent growth. The automobile industry today is booming towards the growth of electric vehicles. Therefore all related sectors of batteries, copper, wires, body parts, etc., can be clubbed in the investor’s portfolio.
Index-based Investing
This investing style comes under the gambit of passive strategy. The focus is on creating a portfolio of assets to match the returns of a market index. The investors easily diversify across the market. The investors of this style try to hold the assets entirely defined by the components of the selected index.
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How to pick the right investment style for you?
Having gone through the 5 fundamental principles and the commonly used investing styles, it is time to choose your own. Among the styles mentioned above, Index is the easiest to invest in. Index-based investing allows proper diversification of assets and investments, which are more turned to the market trend.
The time when you start investing is also a key factor. Suppose you are young and have just started investing; then you have adequate time to experiment. You may choose a Growth or Value-Based investing style. On the other hand, while nearing your retirement age, you need to be defensive and may choose Income-Based investing.
Thus, the financial goal, time period, risk-bearing capability, age, and investment horizon dictate your selection of investing style. However, you can choose to follow more than one style and build multiple portfolios. With time you can formulate a strategy that works best for you.
Investing in today’s macro environment
The investing style you have selected and reaped benefits from may not remain the same in the future. The market changes rapidly, and you should always remain updated with the news. Choosing Value-Based investing or Growth-Based investing depends on how the market feels now: banks’ interest rates, inflation, etc.
For example, higher interest rates impact companies’ stock prices more, so high-growth stocks suffer more than low-growth ones. Low-growth stocks derive most of their present value from future growth and cash flows.
A company looking to be consistently growing at a high rate may suddenly suffer low growth due to changes in demand and better product availability. From a physical mart, the world today is shifting to online shopping. This envisages a change in investment patterns too.
Your investing style thus needs to focus on global scenarios too. A market in a particular country today cannot be restricted to its traditional form of products. You need to understand that one country’s technology or product development will soon come to your country, too, and you must plan accordingly.
The bottom line
The changing market scenarios and individual choices determine the style one chooses. But one point is obvious: only with knowledge and experience can one formulate the right style that matches personal aspirations and financial goals. So, start investing wisely to find your style and minimize financial losses.
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