Hello everyone! I am starting a new segment called Building Blocks where I will share some important skills and knowledge in investing. Of course, I myself am no expert in this field, but I will tap on my limited experience and provide some pointers. So let’s get started.
It is important that one truly understand oneself before stepping into the investing world. By understanding oneself, I am referring to knowing your risk appetite, your investment style, your investment objectives and your plan. I shall just touch on one of them today.
There are many investment styles out there , but most of us fall into 3 big categories. They are value, growth and income investing. All 3 styles are unique in their own ways.
People who are more of a value investor tends to look for stocks that are undervalued by the market. Undervalued means that the intrinsic value of the stock is higher than the market value. This often occurs when some companies go through a period of depressed stock price or when they are near their 52 weeks low. Of course, that’s not the end of it. A value investor do not just go around looking for stocks with depressed price. The company must also have a business that are fundamentally sound. (Low debt, some areas that can boost the company’s earnings etc) Sometimes, the market may misprice all these companies causing their stock price to fall without any reason pertaining to the company’s earning ability. Also, a bad rumour can also cause the company stock price to fall, but value investors may see that this rumour have no effect on the company future growth prospect. All these hidden gems are what value investors look for. At the end of the day, the company must have sound fundamentals to appeal to a value investor.
Some fundamentals that value investors look for: –
- Price to Earnings ratio — Low
- Price to Sales ratio — Low
- Dividend Yield — High
Growth investors tend to look for companies with high earnings growth rate. These companies are usually small and mid cap companies that may have only listed on the stock exchange for a few years. These companies are young and small which allow them to aggressively seek growth opportunities either through mergers and acquisitions or through investing heavily in production. Growth stocks tend to give out low to no dividend because the company tend to reinvest the company’s earnings back into the business.
Some fundamentals that growth investors look for: –
- Strong earnings growth quarter on quarter or annually
- Return on Equity — Increasing
- Profit Margin — Increasing
Income investors are people who invests in companies for their dividends. They tend to look for well established companies (mostly your blue chips like Singtel, DBS) who consistently pay out dividends to their shareholders. Blue chips are usually more expensive per share compared to other stocks but they are known for being more safe in a downturn. To look for these companies, they usually have a strong economic moat (strong market share, strong reputation etc) in the area they are dealing with. Of course, blue chips are not the only companies that dish out dividends. Small to mid cap companies do give out dividends too. However, they may be less preferred as they may not be consistent in their dividend pay out over the years.
Hence, in a typical income investor’s portfolio, you will see a large chunk of money parked in blue chips and maybe a small part in smaller companies that give out dividends.
Some fundamentals that income investors look for: –
- Dividend payout: Consistent over the years
- Market Cap: Mostly large capitalisation
In summary, these are the 3 main investment styles that most of us have. These are not cast in stone. Some investors have a portfolio that consists of stocks with different investment styles. At the end of the day, it is still up to your risk appetite, investment objectives and plan to decide which style is suitable for you. For me, due to my low upfront capital and higher appetite for risk, my stocks are mainly value and growth. That’s it from me today. Have a great week ahead! 🙂