The stock market investment strategies are relevant to investors who are in it for the long haul. There are basically two strategies that an investor can apply; the first one being to "buy low and sell high" and the second one being to "buy high and sell higher".
We would get to these strategies shortly. However, investors are well advised to realize that the other strategies of "selling high first and then buying back low at a later date" cannot reasonably be applied while investing in stocks as we would have to borrow the stock before we can sell it at higher levels, and then we have to consider the interest cost and dividends payable to the original owner of the stock. To apply such strategies would require the investor to route investment positions through the futures and options markets. And the investor must realize that the futures and options markets have their own set of rules and factors to consider. For a better understanding of futures and options, we would suggest that the investor read a suitable book on options, futures and other derivatives
Now to get back to stock investments and stock markets, we can safely state that in the long term stock prices would keep going up. Ideally an investor would buy into an up-company, in an up-industry, operating in an up-economy. Further, holding these stocks for long periods of time to take full advantage of the growth phase of the company.
1. The aspects to be considered with respect to the company would be that it is:
- well managed.
- technologically advanced.
- a market leader or a potential market leader in its industry.
- committed to long term growth and expansion.
2. To ensure a margin of safety and a reduction of risk, the investor would be well advised to diversify.
- Invest in a number of growth companies operating in equally fast growing sectors of the economy.
- Keep a watch on these companies, using every dip in stock price to buy and increase your share holding in these companies.
3. Do not sell these stocks, except in certain specified conditions.
4. The investor is expected to make money by capitalizing on the underlying growth of a fast growth company.
5. The investor is expected to bank on the climate and not on the weather.
6. The advantages of this strategy are:
- Shifts emphasis from timing and price to selection. Thus, making initial selection very important.
- Misses opportunity to sell at peaks, but buys at every dip.
- A carefully selected and diversified portfolio is safer and less risky.
- Simple to implement.
- Maximizes advantages and benefits from tax laws.
- Investments in fast growth companies have low dividend returns, the gains are mainly from capital appreciation.
- Savings on frequent brokerage fees and charges.
- Allows both profits and losses to run. Over time even the loss making positions give profits.
7. An investor would on occasion have reason to sell stocks held in his portfolio. When to sell would be governed by the following:
- Stocks should not be sold solely to en-cash profit or loss.
- Stocks which are loss making should be sold to prevent long term capital loss.
- Stocks of companies which have reached the end of their long term growth phase; and future prospects are questionable.
- When the investor has made a mistake or error in the initial selection of the stock.
- When the price earning ratio (P/E) crosses 40.
- After a steep and sustained rise (of 100% to 200%) in stock price over a period of one year or longer.
8. A investor would have an occasion have reason not to sell stocks held in his portfolio. When not to sell would be governed by the following:
- Simply to en-cash short term gains.
- To shift from slow moving to fast moving stocks.
- In response to current news causing short term market trends.
9. The initial selection of the stock is critical. To reiterate the selection criteria for companies to be held in our portfolio are:
- Well managed.
- Technologically advanced.
- Has long term expansion and or diversification plans.
- Is market leader or a potential market leader in its industry.
10. The investor would ideally diversify his portfolio by investing in stocks of 10 companies spread over the lead industries of the economy.
11. The investor would also diversify over time. That is he would take his time to invest his money and spread his purchases of the selected stocks from the present to a point of time in the future. This would also help in averaging the purchase price and help bring about an additional margin of safety.
12. The investor would be able to give time to his investments to produce results.
13. Do not get upset over and by short term market fluctuations. Bank on the trends and don't worry about the tremors. The investor must keep his mind on the long term cycle and ignore the sporadic ups and downs in daily price movement.