Equity Investment Strategies
Basically, equity investment strategies include a buy-and-hold strategy versus a market-timing strategy, and a value-oriented strategy versus a growth-oriented strategy. A buy-and-hold strategy is a passive strategy. Stocks are selected for their strong earning potential and appreciation over the long term. Generally, as long as the stock's underlying fundamentals hold true (or at least according to expectations), the stock is retained in the portfolio, even though there may be price swings. When the underlying fundamentals no longer support the stock, it is sold. Buy-and-hold does not mean riding a stock to its demise.
A market-timing strategy is more short term than a buy-and-hold strategy. Market timing is used to capture short-term swings. This strategy seeks to optimize stock returns over simply buying and holding stocks. Contrarian investing is a type of market-timing strategy. A contrarian investor may look for certain market indicators that reflect an overbought or oversold condition and take an opposite position against the prevailing trend. For example, excessive short-selling indicates a bearish market attitude.
Short-selling is selling borrowed stock with the intent of buying it back at a lower price. A contrarian would see this as a buying opportunity since the shorts will need to be covered at a later date by buying the stock. Therefore, covering shorts will increase the demand for the stock, which will increase the price. Charting stock prices is another market-timing strategy that seeks to identify resistance and support reference prices for decisions to buy (price hits the support) or sell (price hits the resistance). Charting may also apply to long-term investing depending on the time frame of the price charts.
Value investing attempts to identify stocks with expected higher intrinsic values than currently priced by the market. These stocks are bought and held with the expectation that the market will bid the stock price up to its proper value.
Growth investing attempts to identify stocks of firms with investment opportunities that earn more than the firm's cost of capital. Such opportunities should increase the value of the firm.
Some investors are successful using a buy-and-hold strategy, while others are successful using a market-timing strategy. The same can be said for value investing and growth investing. Although there is no single strategy that fits all investors, sound equity research must underlie any strategy and is necessary for successful investing.
Research may be fundamental or technical in nature. Fundamental analysis researches factors that determine a firm's earnings and growth prospects, while technical analysis assumes that a stock's price reflects the fundamentals and looks for market-price patterns that imply price trends, trend reversals or price consolidation.
The lack of sound equity research is most evident in amateur day-traders who "bet" on price moves from "researching" online chat rooms. Many were devastated by adverse price moves. Trading without sound equity research is more akin to gambling than investing. The more you trade, the more the odds are against you. Successful investing requires an investment plan with a disciplined strategy backed by sound research - like most things in life.
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The information contained herein is considered accurate at the time of posting. CIBC and CIBC World Markets Inc. reserve the right to change any of it without prior notice. It is for general information purposes only.