What should be your stock picking strategy?
The recent dream run on the stock market has lured investors across demographics, occupations to taste the myriad flavours of stocks on display on the bourses.
The recent dream run on the stock market has lured investors across demographics, occupations to taste the myriad flavours of stocks on display on the bourses. However, the dilemma which most of the investors come across is “ What should be my stock picking strategy?”
Here is an explanation.
A fundamental investor often focuses on one or more of the following parameters for a company, either individually or with its peers:
a) Superior Business Model – A unique business model gives the company a competitive edge over its peers and gives superior returns on shareholders equity vs peers. (Eg Dmart)
b) Stronger Brand Equity – Premium on the price of products such as Apple
c)Competitive Advantage – Stronger & Sustainable Competitive Advantage leads to better returns. (Eg Reliance Jio)
d)Quality and Competence of Management
This strategy seeks to focus on companies with attractive valuation metrics, like low P/E, Low P/B, high cash flow that appears to be trading for less than their intrinsic or book value.
C] INCOME INVESTING
This strategy focuses on shares that offer relatively high dividend yields and positive dividend growth rates.
D] MOMENTUM INVESTING
Investing in stocks that have recently outperformed on the belief that the bull run in those stocks continues i.e. invest in buzzing stocks.
E] CONTRARIAN INVESTING
The reverse of momentum strategy wherein buying against the market sentiment at an attractive valuation and sell the stock once it has recovered at a later stage.
F] HIGH-QUALITY VALUE
These are typical “Warren Buffet” stocks characterized by a proven earning growth, solid business model, exemplary management and above-average return on equity.
G] GROWTH INVESTING
Focus on companies that are expected to grow faster than their industry or the overall market. The key metric used is PEG(P/E by Earnings Growth rate)
H] SPECIAL SITUATION INVESTING
Focuses on identification and exploitation of mispricing on account of special corporation events or actions like a merger, demerger, spinoffs, buybacks, restructuring etc.
Every strategy has the potential for yielding desired returns provided the strategy is well researched, properly executed, disciplined and monitored and reviewed and with due consideration of macroeconomic factors. Most importantly, no strategy should be seen in isolation, but all the risk drivers should be taken into account. As Warren Buffet has famously said, “The stock market is a device for transferring money from the impatient to the patient”. The key to success in any investment strategy is patience.