3 investing strategies to win in stock market
Question: I have been investing in stocks for some time now but I am often confused as to what approach to take whenever I make an investment decision. My broker would often tell me to buy when stocks are falling because they are cheap, but also I am always told to buy when stocks are rising. Is there a framework that I need to follow?—JK by email
Answer: There are different kinds of investment strategies that cater to different types of personalities. Every strategy is unique in itself which presents certain level of risk that is acceptable to the investor. Some people may be advising you to wait for stocks to become cheap before buying again because they are the conservative type. Some may tell you to take more risks and buy stocks even at all-time high prices because they are more aggressive.
In order to have a consistent investment strategy, you must have a set of core beliefs, something like an investment ideology that can guide you in making decisions. Without it, you will easily be persuaded by any pretender or so-called market experts to buy certain stocks in the market. Your investments should be anchored on rock solid convictions rather than on hope that the recommendations given to you are correct.
When you make your decisions out of a disciplined investment philosophy, you can always generate a back-up strategy that is consistent with your belief when you make the wrong call. Here are the three basic investing strategies that any investor can follow:
- Value investing
The most common investing approach is to buy stocks that are considered cheap based on relative pricing multiples such as price-to-earnings (P/E) or price-to-book Value (P/BV). When stocks trade at very low P/E or P/BV multiples, it does not mean that these stocks are ready for investment. There are reasons why these stocks trade at such low multiples that warrant reevaluation.
Some stocks trade at low P/E because the company may be problematic or the market does not trust the management to deliver growth in the future. Other stocks that trade at low P/BV or below their book values may indicate that investors do not expect the stock to generate high returns on equity.
If your investing style is more on finding undervalued stocks, you can use pricing multiples to screen potential stocks for value investing. Once you have selected the candidates, validate it by checking its financial and company outlook if they are worth investing.
Most of the stocks that have become undervalued are those that have been ignored by the market for some time because they have small float for trading or hardly followed by analysts.
BDO Leasing and Finance (BLFI) is one example of value investing. This stock has been trading below its book value with average P/BV ratio of 0.92x for the past five years while earnings have consistently grown by an average of 16 percent per year. This year, BLFI has captured the interest of investors and its share price has gained 70 percent to date that is almost double its book value.
- Growth investing
Investors that adhere to growth investing strategy also believe that the stocks they are buying are undervalued similar to value investing. The only difference in growth investing is that the focus is on the new assets, rather than the assets already in place, where the company is investing to grow the business.
Growth stocks normally trade at high P/E or P/BV multiples. This comes as a result of the premium that the market pays for the future value that will be created by the current investments of the company.
Initial public offerings (IPO) are examples of growth stocks because they tend to promise aggressive earnings growth in the future from their new investments. High growth IPOs come in small market capitalization that grew in size over time. Some examples of growth stocks that have become successful IPOs are Xurpas (X) which currently trades at 122x P/E and DoubleDragon (DD) at 229x P/E.
Some blue chip stocks perceived to be mature stocks also continue to play as growth stocks because of their constant investments for the future. Some of these include Jollibee (JFC) which trades at 51x P/E, Ayala Land at 29x P/E and SM Prime at 37x P/E.
- Income investing
If your investing style is conservative and you simply want to have steady stream of income every year like earning regular interest income from the bank, then you should aim for stocks that have high dividend yield. Dividend yield is computed by dividing annual dividends by current share price.
Stocks that pay regular dividends at relatively high payout ratios are normally established companies that have already reached a certain size and no longer pursuing higher levels of growth. These companies distribute the excess cash from earnings to shareholders as dividends.
Example of income stocks are Meralco (MER), which has current dividend yield of 3 percent and PLDT (TEL) at 5.3 percent. TEL, by the way, is in the process of changing business platform and may be less of income stock as the company pursues for new sources of revenues for growth in the future.
Other options for income stocks include listed preferred shares in the market that pays regular dividends throughout the year. Some of the preferred shares you can consider are SMC Series 2 preferred shares or Petron preferred shares, which currently pay roughly 6 percent per year.
As you review these three strategies, keep in mind that the best investment strategy will always be the one that fits your personality. Sound investment judgment with good sense of market timing can help you develop a profitable investing strategy.
Henry Ong is registered financial planner of RFP Philippines. Stock data and tools are provided by Technistock. To learn more about stock valuation and analysis, attend the 9th Accredited Financial Analyst (AFA) program on Sept. 10-Oct 15. To register, e-mail [email protected] or text <name><e-mail> <AFA> at 0917-9689774.
