Bright decided it was time to get into the stock market business and decided to open an account with a stockbroker. He quickly asked for a list of stocks he could buy and then sell for a “huge” profit as quickly as possible. The following six months was a roller coaster as he entered and exited stocks at will and without fear. How in this world had he missed this “business”? After all you needed to do was to buy a stock and then sell as soon as the price appreciates to his sell target. He hardly knew the companies he was buying or what they even did to make money.
Many get into the stock market with this sort of mind set. Whilst many make money this way, they often times fail and when they do it is woefully. The stock market is erroneously seen by many as a place to stake bets without understanding the underlying principles behind how it works. Just like in other businesses investing in the stock market requires that you stick to certain philosophies and understand which works best for you and then stick to you.
Growth and Value Investors are perhaps the two most popular types of investors in the world along with their respective principles.
A growth investor is someone who is predominantly interested in high growth companies. They believe companies that have the potential to grow very fast present the best opportunity for them to increase their returns on investments. Most growth investors rely on technical analysis which is basically the study of share behaviour with the aim of anticipating future movements. They rely on charts and other aspects of share activity to predict how share prices will swing.
They therefore, lay a lot of emphasis in seeking out stocks with a potential to increase their share price within the shortest possible time. Growth stocks also have very high P.E ratios of 25X and above as the market places very high premium on their share price.
Growth stocks also report high revenue growth even if they are not commensurate profits. They grow their revenues by over 100% annually and sell products or services that are eye catchy and fairly new in the market.
A value investor is one that seeks out stocks with high intrinsic value often higher than the market price that it is sold for. They like to buy stocks that they perceive to be undervalued believing that very soon the market will recognize this value and then price the stocks accordingly. They can be very patient and unlike the growth investor prefer stocks with lower P.E ratios (often single digits). In seeking out these value stocks they rely on fundamental analysis a method that relies on the financial statement of a company, its management, competitive advantage and ability to out sell its competitors in deciding whether to buy shares in a company. This is a painstaking technique and requires countless man hours, pouring through financial statements and researching the company behind a stock.
Which is better?
There have been different research as to which investing method provides the best investment results over the years. Some even utilize a hybrid of the two with also very impressive result. Choosing between the two depends on your strengths and ability to make the right decisions relying on either or both.
What you shouldn’t do?
What you should thus avoid is buying shares like you are gambling. Even people who rely on technical analysis spend a lot of time analyzing trends and movement in stocks to determine when the buy sell or hold. You should therefore not buy shares in a company because everyone else is buying (herd mentality) or simply because someone recommended it to you.
Many who speculate in investing in shares claim it is very profitable however, what they probably won’t tell you is that it is also the fastest way to lose money. You can lose all you have made during a yearlong bullish spree in a matter of days.
Margin lending which basically is borrowing money from the bank to invest in shares should also be discouraged if you do not dedicate at least 90% of your business time in investing in shares. It is a very sure way of getting bankrupt.
When you invest in shares you have basically taking a decision to buy a part of a company. You see, even when a friend offer his car for sale, apart from negotiating a price you go ahead to test drive the car and ask you mechanic to check its condition. If you can take that much time in deciding whether to buy a car or not, then why not do same for shares. You must understand the company you are investing and what they do. Find out who the management team and review their competencies. Ask yourself if what they sell is something you will like to buy.
Bright ended up losing nearly all his investing in the ensuing stock market crash of 2009 as he knew little of most of the companies he bought shares in. Stocks he bought at N2 per share have remained at the rock bottom price of 50kobo per share five years after.