Stocks
Investment Philosophy
An investment philosophy is a set of beliefs and principles that guide an investor's decision-making process. It is not a narrow set of rules or laws, but more a set of guidelines and strategies that take into account one's goals, risk tolerance, time horizon, and expectations. (Much of wording in this section is from Investopedia)
All investment philosophies have one thing in common. Making as much money as possible.
Why do you need it? To avoid doing things that are not appropriate for you given your objectives, risk tolerance, and personal beliefs (may include investing in companies aligned with your values - socially responsible investing) . Which strategy is best? Whichever philosophy or adapted philosophy suits you best.
Below are four general investment philosophies worth investigating:
Value Investing
Value investing involves buying stocks that an investor believes are underpriced on the expectation they will rise significantly.
I believe value investing requires you to identify companies with strong earning potential and this is why I did not include the fundamental analysis philosophy
Growth Investing
Growth investing is where investors buy shares of newer companies that are generating above-average sales and earnings growth, in hopes of rising stock prices.
Technical Analysis
Technical analysis relies on the examination of past market data to uncover hallmark visual patterns in trading activity on which to base buy and sell decisions.
For example, the inverted yield curve for treasury bonds is used to predict recessions.
Contrarian Investing
Contrarian investing, as the name implies, goes in the opposite direction of the crowd. Swimming against the current, these investors assume the market is usually wrong at both its extreme lows and highs, selling into rallies and buying when markets tumble.
I am a value investor who strongly believes in fundamental analysis before doing any valuation of a company. Growth companies represent 20% or less of my portfolio depending on technical analysis. I will take advantage of market data and have used options such as calls, puts and covered writes i(these will be explained in another section) And I am definitely a contrarian because I love when the market or an industry has significantly decreased because I am a buyer. I rarely look at the market to check the value of my stocks. Why? because I believe in the businesses I am invested in. I am going to share information and tools I use to manage my portfolio.
Stock Market Data
When I am interested in a stock I need to find out more about it. Where do I get the data? I can go directly to the company and check out their annual reports. This is the best way to get the most accurate data but it is very time consuming. There are numerous sources that provide free (free to me means I also don't have to provide personal data about myself) financial data. I like Yahoo Finance. For a quick visual snapshot of financials I use the Morningstar Financial Section (do this after you select a stock).
Whoever you use to buy and sell stocks will have additional data that is useful. I don't generally follow analyst's estimates but they do generally provide accurate earning estimates. I use research in Schwab to check the following:
Peers and Ratio Comparison. Why? To see how companies compare (use Stock Compare) to one another.
Statements. Why? Look at 5 years instead of just 3 year quick review found in Yahoo Finance.
Before determining how much must be invested in a stock today to gain a desired amount of money at a future date (this is called present value) the stock must pass a quick test.
Intrinsic Valuation
Here is where the real work begins. Now you need to research the company.
When I need to determine if it makes sense to buy a stock I like the intrinsic valuation tool developed by Sven Carlin
Track Performance of Stocks I Own
To track investment performance I use this simple spreadsheet to track both individual stocks and ETF's. I don't worry about tracking dividends because most of my portfolio provides dividends and I rarely sell stocks. My growth stocks do not provide dividends. If you sell stocks more frequently then it makes sense to add dividends to this spreadsheet