Introduction to Investing

• Difference between investing, trading, and gambling

• Risk vs uncertainty

• Productive vs non-productive assets

What is 'investing'?

Active vs Passive

Styles of Investing (and a look at trading)

All approaches to investing or trading in company securities and other financial assets can be simplified into 2 categories: Fundamental, and Technical.

A fundamental approach applies fundamental analysis - the practice of analysing a company's attributes. An investor will inspect various financial reports such as balance sheets and income statements, looking for details regarding company earnings, assets, liabilities etc.

A technical approach on the other hand involves studying the past price behaviour of financial assets, with an eye to what they may do in the future. It is primarily used in trading, where decisions are made based on price charts.

It is worth noting that some investors combine both approaches, for example by using fundamental analysis to get an idea of 'fair value,' and then making use of a more technical approach to judge the best time to enter their position.

With all that said, lets get into some of the most popular strategies.

Value Investing

Howard Marks, in his book, The Most Important Thing, provides a beautiful description of how he thinks of both value, and growth investing.

"For investing to be reliably successful, an accurate estimate of intrinsic value is the indispensable starting point. Without it, any hope for consistent success as an investor is just that: hope."

In order to "buy low and sell high," you need to have an objective standard. That standard is intrinsic value.

Under a value investing strategy, the aim is to buy an asset below it's intrinsic value, and sell it when it regresses back to its intrinsic value, or even rises above it, but - an accurate assessment of intrinsic value is the indispensable starting point, and involves analysing company fundamentals.

Value investors operate under the assumption that the business cycle and psychology of market participants causes assets to deviate wildly from their 'true' value - at times being sold for much less than they are worth, and at other times, for much more.

This investing style is considered by some as boring as it may take years for the market to reassess the fair value of the company you're invested in. Such investments are usually in older companies that have been around for a long time - not the exciting new technology company.

Proponents of value investing are; Warren Buffett & Charlie Munger (Berkshire Hathaway), Benjamin Graham, Howard Marks, Seth Klarman, Mohnish Pabrai, Guy Spier, Li Lu

Growth Investing

Growth investing might be considered 'sexier' than value investing. It is also a fundamental approach, and investors using this strategy aim to find securities whose value will increase rapidly in the future. They will often undertake fundamental analysis, analysing the current financial status of the company, as well as its target market etc.

Such an investor may buy a security above what may be considered 'fair value' at the time of purchase, as they are banking on it being worth much more in the future. As such, there is a higher level of risk involved, as you are possibly 'overpaying' for the company in its current state, and if growth doesn't happen for whatever reason, you may be left in a losing situation.

Growth investing primarily occurs in rapidly developing and emerging industries, for example the technology sector which includes artificial intelligence, robotics, virtual reality etc.

Growth stocks typically have higher highs, and lower lows than value stocks, with growth stocks usually outperforming in bull-markets, and often times being completely wiped out in a bear-market or recessionary times.

Proponents: Philip Fisher, Peter Lynch

Macro-investing/trading

This approach makes use of both fundamental and technical analysis. It is often employed by hedgefunds which both buy long and sell short everything from securities, currencies, commodities etc.

A macro investor also studies economic and political trends to identify risks and opportunities. Someone employing this strategy may bet on the performance of one currency against another, or the price of oil etc.

Proponents: George Soros, Stanley Druckenmiller, Ray Dalio

Day Trading/Swing Trading

A primarily technical approach, but often supplemented with economic releases, a trader trades stocks, bonds, currencies, derivatives or other financial instruments.

A technical analyst in this scenario will execute trades based on price levels and trends.

Such an approach can involve entering and exiting trades many times per week, day, or even hour. The goal is to profit from short-term price movements.

These forms of trading often make use of no fundamental analysis, and take place in derivative markets, where high leverage is common.

Proponents: Jesse Livermore, William O'Neil

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That is a brief overview of some of the more popular strategies in play in the financial markets. There are more, and I may add some to this list in the future. Individuals will usually resonate with one style more than another, and often forsake the other approaches; However, all do have merit, and all have been used to great effect by various people over the years.