During my eclectic investment journey, I’ve learned from three stock investment styles. They have become core members of my investment toolkit. These three styles have enabled me to confidently invest in equities. I have also applied them to other investments. By knowing and applying elements of each, I am able to find investment opportunities and be profitable.
The three investment styles that I use have been around for a long time. They are:
· Dividend Investing
· Value Investing
· Growth Investing
The person who turned me onto dividend investing was Jeremy Siegel, my professor at Wharton. I’d suggest you read his book “The Future for Investors”. He makes a compelling argument for dividend investing and gives you a historical background.
The goal behind the dividend investment style is to acquire stocks of companies that pay consistent dividends. These companies are profitable throughout the business cycle. Since they are distributing real cash, their reported earnings are more reliable. It is more difficult for accounting books when the company has to payout real dividends. Also, the dividends should increase over time as the companies grow their earnings, giving the investor a protection against inflation.
The key to dividend investing is to identify good dividend paying companies that can be bought at a fair or discounted price. I’ve written a checklist for picking dividend stocks in a previous post. If you are a beginner at stock investing, I highly recommend that you start by learning this investment style.
Value investing made Warren Buffet one of the richest men in the world. The premise is that you make money by buying stocks at discounted prices. This means that you pay less than what they are worth.
The key to value investing is to be able to understand the intrinsic value of a company. It requires you to be knowledgeable about the business in order to calculate the “real” value of the company. The value number is subjective because it is based on assumptions. Since value is an estimate based on subjective assumptions, one you factor in a margin of safety when buying stocks. Buffet estimates the intrinsic value of a stock and then he discounts the value by a “margin of safety”. If the stock is pricing below his calculated price, then it would be a potential buy.
There are additional parameters that I use to identify and buy value stocks. In a future post, I will share with you the value investing framework that I’ve learned from studying Warren Buffet. By the way, he also attended Wharton for a period of time.
Growth Investing was made popular in the 1980’s by Peter Lynch, the famous former manager of Fidelity Magellan. He wrote the first book on stock investing that I read, “One Up on Walls Street”. I was a freshman in college and I’ve been hooked on stocks ever since. He introduced the concept of the looking for the “ten bagger”.
The idea behind growth investing is to buy companies with accelerating growth at reasonable prices. As the business grows your stock will increase in value. Peter Lynch used the PEG ratio (Price Earnings to Growth ratio) to define the “reasonable” price to pay for growth. In the future, I will be sharing with you the PEG ratio screen I use to select growth stocks. And I will review what I’ve learned from Peter Lynch. Did you know that he earned an MBA from the Wharton School of Business?
In summary, the styles that I use to make money in equities are dividend, value and growth investing. As you progress in your investment life you will learn to mix and match elements of different investment styles. I encourage you to learn all three styles so you can use them eclectically.
Please post questions in the comments section. I’d like this blog to be a conversation among friends and not a monologue.
By the way, did you notice the Wharton connection across my three teachers?
Thanks for reading. Have a profitably day!