What's your investing style?
All of The Intelligent Investor's analysts would call themselves 'value investors'. But value investing can be practised in as many different ways as there are investors. We recently upgraded a small oil exploration stock [access for members of The Intelligent Investor only] to Speculative Buy. While the most likely outcome will be dry wells and a lower share price, there's a small chance of a huge pay-off.
This sort of opportunity doesn't sit well with my investing style. I don't like lottery tickets. I much prefer a higher probability of a positive outcome but with lower potential upside. I'm also quite averse to losses.
All of The Intelligent Investor's analysts would call themselves 'value investors'. But value investing can be practised in as many different ways as there are investors. We recently upgraded a small oil exploration stock [access for members of The Intelligent Investor only] to Speculative Buy. While the most likely outcome will be dry wells and a lower share price, there's a small chance of a huge pay-off.
This sort of opportunity doesn't sit well with my investing style. I don't like lottery tickets. I much prefer a higher probability of a positive outcome but with lower potential upside. I'm also quite averse to losses.
Other investors, including some of my colleagues, are quite happy to buy what are essentially mispriced 'bets', such as the oil explorer in question (for a very small percentage of their portfolios). They know they'll lose money on most opportunities but once in a blue moon they'll strike it rich.
Your own approach to investment is a very personal thing. It dictates how much cash you hold, how diversified you prefer to be, and what types of stocks you prefer to buy. In essence, your investment style should be based on your risk profile and objectives. Of course, it may also reflect your own investment biases!
For example, my own investment style has the following elements:
1. I tend to hold a lot of cash. I'll virtually never have less than 10% of my investable funds in cash, 20% is more usual, and I have been 50% in cash on occasion. This ensures I am well-positioned to take advantage of buying opportunities when they present themselves.
2. Because I'm averse to losses, I'm quite careful about capital allocation and prefer to be well diversified, although I will occasionally make a very significant investment (see point 3 below).
3. I rarely fire all my bullets at once. If I think a stock is a great opportunity, I'll build up a holding over time as the story unfolds (perhaps over a year or more). Very rarely, I've had up to 25% of my portfolio in one stock (as I currently do, but it's too small to cover in The Intelligent Investor).
4. I steer clear of very speculative companies, which means I never buy explorers or biotechs. I also avoid companies that don't have some track record of profitability.
5. I'm rarely interested in asset plays, having found that the value often erodes before it can be realised.
6. My 'ideal' opportunity is typically a cyclical stock that's down more than 80% from its high, which is trading on four times peak earnings and where there's some director buying. My best stock picks have typically come from this category.
There are plenty of other rules I stick to when managing my own portfolio, and probably some that I'm barely conscious of. All of them make sense based on my 'brand'Â of value investment, but there are plenty of other brands out there. The trick is finding the one that suits you.
What's your investing style? What type of companies do you prefer? Have you had particular successes (or failures) with certain types of stocks? Are there any portfolio rules you stick to?
If you're interested in portfolio management, don't forget to read our special report Building and Managing your Portfolio [access for members only].