Which Investment Strategy Is The Best

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Continuation from yesterday…...(Costs Associated With Short Selling)

Finally, before we can answer which of the investment strategies above is the best one, we have to consider an important issue. We must first define what goals most investors have. Unfortunately, the investment industry has done quite a job cutting and dicing what should be a simple classification into a million different pieces. Anything from divorced housewives on fixed alimony income to 95 year olds with advanced derivative strategies.

Luckily for us, human nature and greed never go out of style. If given a chance, 99% of all investors, no matter the age or risk profile would want the exact same thing.

A massive capital gain.
In the shortest possible period of time.
While taking on very little, if any, risk.

The real question becomes, which of the strategies above can get us to the above mentioned points the closest?

As you can probably imagine, none of them. Every one of the strategies above has their own shortcomings that would jeopardize the objectives above. For instance, most value investments take a few years to play out. Blowing our “short time frame” requirement completely out of the water. Investing in growth companies is inherently more risky and trading or overtrading rarely leads to large capital gains.

So, what is the ultimate solution?

As always, the answer lies somewhere in between. If we are to bring the strategies above together, we might just be able to achieve our ultimate objective. By taking the best parts and disregarding the worst, we might be able to stitch together a strategy will satisfy all of our high return and low risk profile requirements. Let’s see if we can get it done.

Value Investing: (Minimizing Risk)

Let’s Take: Undervalued and out of favor companies. Cheap stocks that for one reason or another selling well below their intrinsic value. Stocks that have collapsed over the last few months or years to the tune of 50-90%. Stocks of companies that are turning around, but their positive change haven’t been realized by the market.

Let’s Disregard: Uncertain holding periods and buying stocks with weak technical indicators.

Growth Investing: (Maximizing Returns)

Let’s Take: Fast growing companies. Stocks that are appreciating at a fast pace. Stocks with strong technical indicators.

Let’s Disregard: Highly speculative companies. High risks associated with extremely volatile industries and overvalued companies.

Trading: (Perfecting Timing)

Let’s Take: Clearly defined rules and market timing techniques. The ability to take both sides of the trade….long and short. The willingness to study trading and make necessary adjustments. Strict risk management rules.