Constant Ratio System: Unlike the constant naira system, the same percentage of funds is divided between different assets. When the balance is upset, is periodically restored by moving money from over-performing assets to under-performing ones. This system prevents one assets class from dominating portfolio. This is one way to maintain a desirable asset allocation. Variable Ratio System: This is a variation on constant ration system that relies on market timing to shift the proportions of the various asset classes contained in the portfolio. Buying low and selling high is built into this strategy, but, like the constant naira system, prolonged movement in a given direction will harm returns. Bottom-up Analysis: This is a name for investing strategy that focuses on the fundamental of individual stocks as opposed to the state overall economy.
Investing Based on Insider Activity
Another strategy for investing involves looking out for what insiders at a company are doing with their stock. Keeping an eye on insider trades can be useful because it allows you to see what the people who have a large sake in a company are doing with their stock. These insiders are often the ones who know what is going on at the top levels of their company, and so they may have the best information about whether a company’s stock is actually worth more or less than the current price. Insiders can be either individuals or corporations. They are required to report both direct holdings (which are held in the name of the insider) and indirect holdings (which are controlled by the insider but held by a family member, trust, company, plan, or corporation with which the insider is affiliated). Note that we are talking specifically about illegal insider trading (that is insider who are trading based on privilege information), but instead about all types of insider trades, including when know such privilege information exist, but the insider are just generally confident about the company’s outlook.
Contrary Investing
Contrarian investing is a strategy that relies on behaving in opposition to the prevailing wisdom, for example buying when other are pessimistic and selling when they are optimistic, or buying out-of – favor stocks and selling them when they are popular again. In an extended bull market, the term contrarian can begin to mean someone who is bearish or prefers value stocks to growth stocks, although this is really just a subset of contrarian investing.
Naira Cost Averaging
Naira cost averaging is a good strategy for beginners. It involves regular contributions of a fixed naira amount to a portfolio or specific investment. At each interval, the chosen amount is invested, removing any emotional motivation to react to short-term changes in the value of the investment. Of course naira cost averaging does not guarantee a profit, it does encourage consistent investing and prevents short-term movement from leading investors to make emotion-base decisions that could harm their long-term strategy. Because the investment is purchased at a range of prices over time, fluctuations in price are evened and the initial price has a far smaller impact on the returns at the time the investment is sold. The average price paid trends toward the current price at each interval. As a result, the gap between the value of the money paid in and the current value of the investment decreases. However, the average price does not move fast enough to completely eliminate the possibility of profit of loss. Although negative gap from growing between the price paid and the current price, it limits the potential for a positive gap in the same way.
Essentially, naira cost averaging is ideal for investors who wish to eliminate the risk associated with timing the price of an investment and reaction to short – term results at the expense of limiting themselves to a decidedly conservative strategy. Some investors believe naira – cost averaging is most effective when a stock is under-performed because more shares can be acquired for the same regular investments amount. However, better performance is not guaranteed and that aspect should not be the primary motivation for adopting this strategy.
Income Investing
Income investors practice a very straight-forward strategy. They buy stocks with the highest dividends and dividend yields. Income investors focus primarily on securing a steady income stream, instead of worrying about capital gains (although they obviously hope that the shares will increase in value). The stocks of large, well-established companies usually quality as income stocks. Income investing is one of the more conservative stock strategies, yet there are still the usual risks involved in investing in equities. In some respects, this strategy is closer to bond investing than stock investing, even when stocks are used. This strategy in Nigeria is usually practiced by the order/retiring/retired investors.
Quality Investing
Some investors investment preference can sometimes be classifies as quality investing. This is a sort of hybrid approach in which the investor is searching not for questionable companies at bargain prices or exceptional companies at outrageous prices, but good companies at good price. This strategy relies on a combination of quantitative and qualitative factors which we will discuses in another edition of our series. Quality investors rely on a fairly simple investment strategy that can benefit any investor interested in identifying good values. They look for great stocks, then buy them and hold them for several years or more. The trick here is to look at your investment as if you were buying a piece of a business, not just shares of its stock. In this sense, the management of the underlying company is an important criterion in the investment decision. In this regard, the value of the business is determined by totaling the net cash flows you expects to occur over the life of the company and discounting them by the appropriate interest rate. You may add a premium based on the risk involved in the particular investment. The focus here will be on return on equality, operating margins, debt levels and capital expenditures to identify the best investments. Quality investors believe that diversification is less necessary for those able to confident will signifying a few good values is far more important than spreading invested money across a typical diverse portfolio.
Growth At a Reasonable Price (GARP) Investing
It is often difficult to choose between the value and growth approach to investing. If you can not choose between the growth approach to investing in stocks and the value approach, then you might want to consider what in advance market is referred to as the “GARP” approach. GARP stands for growth at a reasonable price. Accordingly, GARP investors invest in companies with growth potential whose stock price is under valued. This as you can imagine is a difficult task since growth and value stock tends to have opposing characteristics, but it’s not impossible. Also you can make a huge amount of money if you get it right.
Value Investing
Value investors look for stocks that are selling at an attractive price; in other words, they are bargain hunters. This does not means that value investors buy stocks because they are “cheap” (such as penny stocks); value investing utilize several measure of a company’s value to identify stock that can be purchase for the less money than the worth, regardless of whether they are worth 10 Naira or 100 Naira. Although its impossible that a growth stock could represent a good value, growth investing and value investing are usually consider opposing strategies. This is because value investors tends to focus on traditional valuation metrics such as the P/E ratio, looking for low ratios which are typically not found in growth stocks. Value stock often are ones which are fallen out of favor with the investment community for one reason or others, perhaps because they are in a slumping industry or because they are reported poor earnings
Growth Investing
Growth investors focus on one aspect of a company: is potential for any growth. They believe that the companies with high earnings growth will see their stock price continue to increase, since investors will want to own profitable companies that can pay large dividends in the future. The number that they pay the most attention to earnings per share, especially how it changes from year to years, although the sometime look at revenue growth as well. Some investors also compare the price/earnings ratio with the annual earnings growth, to get a feel for how much the market is willing to pay for a given rate of earning growth. Growth stocks tend to be from young companies, so they are often riskier than the average stock. They have the potential to large gains, but they also have the potential for large losses.
Market Timing
Market timing is essentially the opposite of buying and holding. Market timers believe that it is possible to predict when the market, or certain stocks, will rise and fall. It therefore makes sense to buy when the markets are low and so sell when they are high in order to maximize profits. Marketers can use any number of different methods for timing the market-technical analysis, fundamental analysis, market rumors or even intuition. Most experts agree that market timing is incredibly difficult if not downright impossible. They also warn against it, because it is hard to sale when the market or particular stock is high or low. Often a seemingly low stock will go lower. Moreover, commission eat away at your profits when you trade frequently, especially on small transactions. In the long run, the market goes up. Unless you are a superb timer, you will do better staying fully invested at all times.
Buy and Hold
The “buy and hold” approach to investing in stocks is predicated on the assumption that in the long term stock prices will go up. According, since the average investor does not know what will happen tomorrow the best thing is to buy fundamentally good stocks, ignore short term vacillations in their prices and keep them for many years. This is often the case in emerging markets where the scope for growth is usually faster and in line with risk which is usually higher. Historical data from the Nigeria Stock Exchange supports this claim. The logic behind the idea is that in a capitalist society, the economy will keep expanding, so profits will keep growing and both stock dividends, other corporate actions and consequently stock prices will increase as a result. There may be short term fluctuation, due to business cycles or rising inflation, but in the long term this will be smoothed out and the market as the whole will rise. There are also additional benefits to the trading commissions which will be a lot lower than if transaction occurred more frequently. Under this strategy, the investor after completing in –debt research and analysis buys fundamentally good companies and hold them for several years. One weakness of this strategy is that it assumes that growth is infinite and that historical stock-return data provides valuable guidance for predicting long-term stock returns.
