strategy for investing in stocks, 5 successful strategies

Thus, regardless of the mistaken ideas may have professionals / researchers in a separate point in time, that may make a motivated by hunters in the value of, to try to find potential candidates to buy? There are at least five different investment approaches, based on the value. Probably, there are more, but these are only some of the most interesting among them:

1. Deep value (shares at a discount)

We recently reviewed the options available for investors to find cheap shares, which included a look at some of the strategies deep value Ben Graham. In them Graham accepted the ratio of price to book value (PB) as a measure of value, and brought him to what is known as NCAV investing — or investigation of the net present value of the assets of the company (net current asset value). The method includes the subtraction of current assets (such as cash, inventory and accounts receivable), on the grounds that these articles can be easily liquidated in the event of a complete failure of all of the obligations, to get NCAV. Any action, which is traded at market price lower than the price NCAV, was a potential candidate (although there were other provisions), Graham also searched for the safety margin of up to 33% below that level.

He also developed his own «defensive» and «entrepreneurial» approach (depending on the experience of the investor). The rarity with which there are «defensive» candidates, means that, probably, the business strategy offers the greatest interest for serious investors. In it he proposes to seek: (a) relatively unpopular large company, b) the special situation and discounts (traded below book value net asset per share — note of the translator). However, this is not an easy approach to use. As he wrote:

The defining feature of the enterprising investor is his willingness to devote time and effort to the choice of securities, which at the same time stronger and more attractive, than on the average.

Also in this extreme approach to transactions with cheap shares is very important to avoid the trap of value.

2. Shares on the recovery (J. Пиотроски)

One of the problems with the cost of the shares is that you, as a rule, buy quite restless and difficult-company — someone once called this strategy get hold of the nose and buy. The risk, therefore, that you invest in companies that either банкротятся, or simply not be able to ever recover (known as traps value). Diversification is one of the ways to get around this, but another neat option for investors, who want to have more comfort in its actions, it is the F — Evaluation, which was developed by Professor of accounting at Stanford Joseph Пиотроски. F — Assessment is a simple indicator for the allocation of shares, which shows the most likely prospects for rapid recovery from the basket obviously undervalued companies. After the definition of the bottom 20% of the market on the basis of estimates of the relationship of price to book value Пиотроски tests each share of nine criteria, based on the accounting reports, including indicators of profitability, leverage, liquidity, sources of financing and operating efficiency. Its aim is using a necessary fundamental analysis, find out why each company currently underestimated, whether it is justified and which ones have the best chance of recovery. and then buy them cheap.

3. The cost of the move (J. Лаконишок)

Citing earlier on the impact of scientific research Joseph Лаконишока, it is worth noting that he (together with Andrei Шлейфером and Robert Cherry) went to the formation of the company LSV Asset Management, which currently manages portfolios of shares worth 58 billion us dollars. In resolving the question of traps value approach Лаконишока is to find undervalued, not popular companies at the time when the market begins to recognize them. From the point of view of fundamental perspective, it begins to look at the relationship of price to book value, price to cash flow, price to earnings, price to sales in order to identify shares which are not enjoying the love of investors. Then he looks at those shares, which show signs of movement, both from the point of view of the pulse prices (relative strength), and in terms of improving mood analysts and surprises in the profits.

It is important to note that Лаконишок also pays great attention to behavioral Finance his studies assume that the «glamorous shares» often exceed the value of the shares, as investors naturally gravitate to the popular shares, which inevitably leads to the growth of their prices to a level which does not correspond to their fundamentals. So he offers avoid the tendency to extrapolate the past too far into the future, mistakenly equate a good company to a good investment, regardless of the price, to ignore the statistical data, as well as to develop the installation of the company.

4. Cheap, but good («Magic formula»)

For Joel Greenblatt, founder of the successful new York hedge Fund Gotham Capital, the mantra of buy cheap, sell dear lies in the basis of his now legendary strategy «Magic formula investing».

However, instead focus on how you can more than cheap stock, Гринблатт adds a filter for quality. A magic formula explores two indicators for this promotion: a high return on equity (return on capital) and high income (earnings yield — or, to put it another way, it must be «good» and «cheap». Criterion Greenblatt focuses on how effectively the company receives income from their assets and then evaluates them, by dividing the operating margin (operating profit) on the value of the enterprise (enterprise value) — the higher the yield (earnings yield), the cheaper action. Рейтингуя market between maximum and minimum value for each indicator and adding two rating, the investor by means of calculations on the «Magic formula» can find all the appropriate company in the market.

The idea is that by choosing a basket of 20 or 30 of such shares, the investor could mitigate the likely disappointment of some of the shares, trusting estimates that does not need too much success, to strategy has justified itself.

5. Quality at a reasonable price (Buffett)

At the far end of the spectrum, the «cost vs. quality» is Warren Buffett. We have already talked about other investment criteria Warren Buffett, but it would be a loss not mention the influence of the school of the cost of the investment of the world’s most successful living investor. Buffett was a disciple of Ben Graham and acknowledge his influence on his philosophy of investing. Buffett also pays great attention to the privileges of business and quality management, and has moved from what he calls the investment in «butts». In fact, he is looking for a simple, understandable companies, which have a monopoly status and power pricing (for example, using a good brand recognition), in order to ensure a consistent profit and good profitability of own capital. So he is ready to pay for the privilege of business, but — as a good value investor what it always was — only there, where the price is still at a significant discount to intrinsic value.

Mystery value

While debate about the merits and risks of the cost of investment as old as the world and can go on forever, an understanding of the techniques used by successful investors to determine the value, it is probably more useful for the practically minded investors. You saw that in the school value, there are a number of different approaches — from hunting Ben Graham for cheap shares, at one end, to focus Warren Баффетом on quality, on the other, and all of them are studying in order, so that you can develop your own opinion on what is the costwhen will choose stocks.