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[sharechat] LTI series: Investment styles and selecting stocks (1)

From: "G Stolwyk" <>
Date: Sat, 19 Jan 2002 19:08:26 +1300

Readers, please note that these posts discuss investments on a longer term basis, only. The reader is not asked to imitate my investment style or to imitate the basis of selecting or owning of any stocks which are discussed in these posts: My investment behaviour may change without notice. Please note that I have no public qualifications to advice on investment. Any resulting action from reading these posts by the reader, will be entirely at the reader's risk.
Investors will need a level of education before investing. FIG ( See Message Boards ) and various books are available to facilitate investing. My posts assume that the reader already has referred to these sources and to some of my earlier posts of this series. Property, bonds and other securities will not be discussed. 

1. Investment Styles.
Before any selection of stocks can be made, the potential investor will need to decide on the most suitable investment style or combination of styles.
J B Were has classified the following:
The Value Investor: Looks to invest in shares when they are below their estimated value. Value is assessed through investigation of a company's financial performance and would include measuring price and profitability relative to other companies that operate in a similar industry.
 For example, the investor may use P/E ratios as a simple measure to identify where a company looks cheap compared to its competitors and the market overall. My note: there are other parameters to consider as well.
The Growth Investor: Looks to invest in shares with the potential for higher future growth than the market average. The investor is less interested in the current price or dividend stream and more focussed on the E/S growth expectations.
The Business Cycle Investor: Follows changes in the economic cycle and looks for movement of shares that will react to those changes either negatively or positively. This investor will trade shares on a shorter time frame to reflect the timing of cycles.
 This style of investing can be higher risk as it is often difficult to predict cycles. My note: The status of the international economy and / or that from the major trading partners will be of interest to this NZ domiciled investor.
The Index Investor: Looks to invest in shares that are included in a particular index and responds to changes in that index when making buy or sell decisions. 
J B Were mentions that sometimes fund managers mix their styles and so are called " neutral" investors Their aim is to assess shares based on a number of criteria from the styles listed above.
My note: Some investors may also be more interested in dividends and these can take a dominant place in the ( Growth + Dividends ) returns.
 2. Discussion.
The investor will need to be comfortable with the style(s) they wish to adopt. A Stock picker will select a number of stocks from one or a number of markets ( countries ). This requires study and some ability to evaluate the various factors which may now or later impact on the value of his/ her investment.
The Index Investor uses a 'broad brush' and hopes that it will outperform the market: The index can have poorly performing stocks as well. Share indices, eg. the NZ 40 or the 200 AX. indices, will regularly have some of these stocks replaced with superior ones. 
The investor may decide to buy units in an Investment Trust or Unit Trust and leave the monitoring of several investments, the Trust holds, to the Manager. While I am a stock picker, I would buy into an Investment Trust to cover unfamiliar markets, eg. Europe, the US.
Selection of the right vehicle will be important and the investor will still need to study the pros and cons of a particular trust. Timing of entry into any investment can be important.
Taxation rules on these trusts and their dividends will need to be known. Shareholders will also need to know the IRD rules on holding shares and tax on trading.   
NB: Further items will be mainly of interest to those stock pickers who are longer term holders of shares:
3. How many stocks do I select and how much finance do I need?
If all the cash is put on a 'certainty' and it goes bankrupt, then, one may not be able to 'fight another war'.
If too many companies are selected, then the quality and returns must eventually decline; after all, out of say 15 hand picked companies, the first four or five may offer the highest returns!
Watch lists of promising companies can be kept in the computer and data stored in folders. This list is upgraded from time to time. 
One would need at least some $ 10, 000 dollars , to select say a minimum of 4 companies for a start. Broker's fees will be too high for that lot but on-line trading will reduce costs. Alternatively, one could select two good investment trusts which invest in a number of companies.
Some brokers have a scheme which enables buying of smaller parcels over time by installments. That could be an ideal solution! ( ABN-AMRO Craig is one of them ).
If I had say $30k - $50k to invest, I would select 4 to 5 companies. At $75 - 150k, approx. 7 - 8; at $200k - $300k about 9 - 11, and up to two trusts. If I had some $500 k, then I would have no more than 14 companies and say 3 trusts in my portfolio. Investments can be weighted.
[[ Other, less aggressive investors, may select 6-8 companies to invest $30k - $50k in. Or 8-12 comp. for an investment of  $75-$150k; or say 13 comp. and two trusts, given $200 - $300k.  If one had $ 500 k, then one could have say 16 companies and 4 trusts. A greater number of investments may require more markets to invest in: the idea is to select the best from a couple of markets -and hence increase profits - rather than a relatively large number of investments from one market: Opportunities decline as more selections are made, particularly, in a smaller market ]].    
If, from time to time, one has more than the given number, then these may be reduced over time. 
Other investors who don't have the time and/or aptitude for stock picking, may select Trusts and Index funds. I prefer to select my own stocks and would only use Investment Trusts (preferably) in markets or sectors where I can see opportunities but am not able to assemble a variety of stocks, eg. pharmaceutical or technical investments.     
In reality, there are a large number of combinations of styles and attitudes. The psychological make-up, health and age can decide the investment style( s ).  
Amended: 10/1/02
( To be cont.)   

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