For investors whose objective from the share market is to achieve Capital Appreciation there are three main strategies that can be employed, or which Stock Doctor would recommend the first two. They are:
- Value strategy
- Growth strategy
- Speculative strategy
Capital appreciation seeking investors will focus on the Star Growth Stocks as a priority, and may wish to consider Borderline Star Growth Stocks as a way to cover any gaps within the portfolio.
1. Value strategy
The value investor is of the belief that the way to make money over the long term is to identify stocks that are cheap and you exit once they are expensive. Because if there is no value in the price for us as investors then why invest in it? Therefore the current share price and how it is positioned to the valuation is a key determinant of when to buy and sell a stock.
Value investors will believe in the idea of 'being greedy when others are fearful and fearful when others are greedy' because they understand that the best time to be a value investor is during times of extreme volatility for the market, often to the downside. This is because when sentiment plays havoc with share prices, real deep value often appears. For this reason the value investor is often patient and will not make rash decisions simply because price is going up.
In order to master the art of Value investing a strong will and control of their investment psychology is required. From Stock Doctor's perspective, should broad market corrections cause stocks to correct, by identifying Star Growth Stocks and Borderline Star Growth stocks who are trading at a deep discount to their valuation is a good way to maximise potential value.
Using the Lincoln 9 Golden Rule framework a value investor will obviously be looking at Star Growth stocks and Borderline Star Growth stocks as a priority.
The fact they are seeking value means they place more of an emphasis on Golden Rule #4 - Share price value in order to help them identify stocks that are trading at a discount.
Value investors pay little notice to Golden Rule #5 - Share price sentiment as they understand that deep value only occurs when the market fails to have already recognise the fundamental strength of a stock or despite its quality it has been unfairly sold off.
Other rules the value investor will pay attention to are:
Golden Rule #7 - Principal activities This is because price may be down due to an event or significant downturn in the health of the sector the company is operating in. If that is the case it often difficult to see what catalyst will occur to convince the market the stock is a buying opportunity rather than being one to avoid.
Golden Rule #8 - News and announcements Often a big sell down in a stock is accompanied by some news that the market has taken as a negative. Value investors need to do their research into the announcement in order to ascertain whether the move was an over-reaction or justified. If justified then value investors will not invest as negative business performance may result in the stock becoming even cheaper over time.
2. Growth strategy
The growth investor is someone who is on the look out for businesses that are performing well today, however are also deemed to have good growth potential where earnings are expected to grow at an above-average rate compared to its industry or the overall market. In order to participate in this growth investors are comfortable often paying a premium to participate in that above market growth backing management to achieve success.
Unlike value investors who find opportunity in moments of price/value disconnect, growth investors are focused on companies that are performing strongly and more importantly are expected to continue to perform strongly into the future. The idea being that if a company grows its profits over the long term then the share price will look after itself. Therefore the goal of the growth investor becomes trying to identifying stocks with the strongest growth prospects.
The growth investor also looks for market support in validating the quality of the company's performance and will therefore look to share price sentiment being positive over the recent time period (maximum 12 months). A positive share price will reflect the market's positive view on the business, its operations and the industry that it is in.
Using the Lincoln 9 Golden Rule framework a growth investor will obviously be looking at Star Growth stocks and Borderline Star Growth stocks as a priority.
The fact they are seeking companies with above average growth prospects means they place more of an emphasis on Golden Rule #3 - Outlook and forecast in order to help them identify stocks that are expected to grow into the future.
Golden Rule #5 - Share price sentiment also plays an important role in helping the growth investor identify market support for the business.
Growth investors pay little notice to Golden Rule #4 - Share price value as often the pursuit of strong businesses that are expected to grow into the future may mean that investors will have to pay a premium for that stock today in order to participate in benefits tomorrow.
Other rules the growth investor will pay attention to are:
Golden Rule#6 - Market size and liquidity Often smaller businesses are the ones with the greatest growth potential as larger businesses tend to already be operating at peak capacity. Getting into smaller companies before they become bigger ones tomorrow is what the growth investor is focussed on doing
Golden Rule #7 - Principal activities A leg up from a hot industry also helps a company grow and investors therefore seek these sectors to help identify stocks that are growing at an above average rate.
Golden Rule #8 - News and announcements The support of good news validates the opinion of a growth investor. The potential of grey clouds through negative announcements are avoided by the growth investor at all costs.
3. Speculative strategy
This 'pick and hope' strategy is fraught with danger and often leads to significant losses. Lured to such a strategy in the hope of finding a 'ten bagger' investors will taken unnecessary risks in the pursuit of short term gains.
Investing in 'stories', rather than fundamentals, investors are often lured into these fairy tales by the dreams of early retirement. However the harsh reality in the share market is that not all fairy tales end in happy endings.
Stock Doctor recommends extreme caution if investors are implementing such a strategy and ultimately would prefer investors avoided it.