There are hundreds of thousands of stocks in the markets, which make it important to invest in smart ways.
Which one should I pick and when is a good time to buy/sell?
In fact, we can get answers from the investing philosophies of three great investors- Warren Buffett, William Gann and John Bogle. Many of us are familiar with their investing styles, or more precisely, strategies.
They are the most typical representatives of their types, that is Value Investing, Technical Analysis and Passive Investing respectively.
Warren Buffett is one of the most respected value investors. He focuses on the company’s fundamentals and intrinsic value. This investment school is also called fundamental analysis.
If a stock trades below its intrinsic value, it is considered undervalued.This offers an opportunity for you to profit by buying stocks at discounted prices. That’s why value investors are also called bargain shoppers.It’s tempting to discover an undervalued investment.However, as the information about companies are more public and accessible, prices of good companies normally represent their values.Buffett’s trusted partner, Charlie Munger once said: "A great business at a fair price is superior to a fair business at a great price.”Therefore, value investors tend to look for great companies at reasonable prices, instead of sticking to cheap stocks.
How to become a value investor?
First and foremost, focus on fundamentals, which includes business model, competitive advantages and growth potential.
It’s not over yet.Valuation matters a lot.Still remember what Munger told us? For even great companies, we should also buy them at fair prices.
There are many ways to value a company. PE and PB ratios are popular metrics used in company valuation. They will be explained in details in following chapters.
When talking about investment strategies, you won’t skip over technical analysis. Unlike fundamental analysis, it focuses on reading charts.
Technical analysts believe that future performance of a stock can be predicted by analyzing past trading activity and price changes.Therefore, they like to discover trading opportunities in price trends and patterns.Technical analysis is used to improve timing the market effectively, which can help you make a decision on when to buy, sell or hold cash. To become a technician, you are expected to master three skills: reading price charts, understanding support & resistance, and identifying market trends.
Last but not least, is about passive investing.
John Bogle, the grandfather of passive investing, believes that it is so hard to beat the market that we should just buy the whole market to get an average return.
Simply put, passive investing is a very friendly way for most investors, especially beginners.You don’t have to spend much time on doing company researches or analyzing complex price changes.
To sum up, we have introduced three ways to invest in stocks.
In the upcoming chapters, we'll discuss how to practically apply these three strategies.