What's your investment or trading style? Part I - Fundamental Investing

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What's your investment or trading style? Part I - Fundamental Investing5 months ago - Chartmill

Investors and traders come in many sizes, shapes and weights and it is no different for the different types of 'investment styles'. Are you rather active or passive? Are you mainly technically or fundamentally inspired and do you go for the short or long haul?

Questions you' d better think about and answer in all honesty. Preferably before you start investing. After all, you want to avoid only later realizing that you would rather have done things differently. Without that knowledge, it is impossible to work out a trading strategy that should form the backbone of your ultimate investment goal and horizon.

In this article we give a short overview of a number of possible investment forms. In doing so, we have distinguished between a fundamental and technical approach. In this first part we will look at the fundamental types of investing.

For each component, more extensive articles are available in our documentation section. We have provided links that will quickly take you to the right article.

Ready to get started? Here we go!

BUY AND HOLD

What is it?

Buy-and-Hold is a kind of catch-all term that can accommodate different fundamental approaches. But what they have in common is that the investor maintains a long-term perspective, independent of the economic cycle in which the market finds itself. The search for stocks (selection) is done on the basis of fundamental analysis whereby a company is evaluated on the basis of its annual accounts and quarterly figures. The management itself will also usually be a parameter in this process.

The stock portfolio is built up steadily in this way and over time can include dozens of different companies.

Read a more detailed article on Buy and Hold investing through this link.

Obviously, a Buy-and-Hold approach does not take into account all kinds of technical analysis indicators or stock market trends. The approach is simple, stocks and other financial products are bought and held for as long as possible. The focus can be on value, growth or pure quality. Those different options are discussed below.

DIVIDEND INVESTING

What is it?

Stock returns are determined by the increase in price on the one hand and the dividend paid to investors on the other. The dividend investor looks specifically for stocks that pay a (high) dividend in order to generate a steady stream of income. This income can either be converted into cash or the dividend can be reinvested (a combination of both is also possible). It is important not only to look at the size of the dividend, the company must first and foremost be financially healthy. The company's results are extremely important in determining the future dividend. Be sure to check to what extent the dividend yield has remained stable in the past.

Read a more detailed article on dividend investing via this link.

Possible screens in ChartMill?

The dividend investor is looking for financially sound companies that offer a nice and above all stable dividend. Here you can read what to look for when looking for quality dividend stocks.

A number of ratios that are important when looking for dividend stocks and that you can set in our stock screener:

  • Dividend Yield and Dividend Growth
  • Payout Ratio
  • EPS Growth (to compare with the Dividend Growth)

Check this screen to find US-dividend stocks.

VALUE INVESTING

What is it?

The value investor looks for undervalued stocks. This undervaluation must be reflected in the earnings and profitability of a company, measured against the current prevailing share price. When value investors consider that this price is (much) lower than the intrinsic value of the company, they will buy the shares, assuming that over time the true value of the company will be recognized by more and more investors. On such undervalued stocks, value investors will additionally apply a margin of safety to hedge against loss as much as possible if their assumption turns out to be wrong.

Read a more detailed article on value investing via this link.

Possible screens in ChartMill?

You can read what fundamental ratios are involved when looking for value stocks here. At the bottom of that page there are also some predefined value screens available.

GROWTH INVESTING

What is it?

Growth stocks are mostly young promising companies that offer a lot of potential in the eyes of analysts and investors. They are characterized by very pronounced revenue growth. Turnover that is just as quickly invested, however, in order to further accelerate the growth curve. The downside of this is that because of these huge investments, no or hardly any profits are made. This ensures that the price/earnings ratio of typical growth companies is usually very high, or in other words, the current share price is expensive relative to the profits that the company makes just because the future expected profits are already partly priced in. Those who invest in such shares therefore pay a premium. The underlying idea with growth investors is that high growth will eventually lead to very significant excess profits in the future. Growth stocks undoubtedly offer opportunities for huge returns but the risks are also greater than with other fundamental strategies.

Want to read more about the pros and cons of growth stocks? We'll take a closer look at them in this article.

Possible screens in ChartMill?

We discuss the specific quantitative criteria that apply to growth stocks in this article.

In this video you can see how we specifically use ChartMill to discover growth stocks.

QUALITY INVESTING

What is it?

Those who want to invest in quality stocks do so by looking for companies with stable and increasing returns on capital but without excessive debt. Preferably even companies that have a net cash position. Other characteristics of pure-play quality companies are strong sales growth, a solid market position and a pronounced "moat" that makes the likelihood of heavy competition relatively low.

You can read more about this way of investing and the difference with pure value investing in this article.

Possible screens in ChartMill?

To be added when available

The ChartMill Team

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