Investment Approaches, Strategies and Recommendations

Get out of the dollar, teach your children Chinese and buy as many commodities as you can. – Jim Rogers

An investment approach is an investors strategy to achieve the desired outcome – taking into consideration the risks and rewards of the strategy. Some common strategies are outlined below.

Investment strategies

Day Trading involves trading shares within the day, but sometimes shares can also be held for a short term – which sometimes literally means seconds. Usually, all purchase trades are matched with sell trades throughout the day, meaning there is not an open position (you will not own any shares) at the end of the day. This is a highly risky investment strategy and requires time in front of the computer assessing when shares are trending upwards or downwards and acting immediately. Unfortunately, there are not many tales of successful day traders, so this might be an investment strategy left to the believers.

This strategy was popular during the dot com boom era in the late 1990’s when most stocks were going up and investors were not sophisticated. There was much talk that everyone was making “easy” money, but everyone can make money in a rising market. When the tough times come, the investors with a sound strategy will continue their success.
Day traders often borrow money to trade; this is known as margin lending (borrowing to trade shares). Margin interests is usually only charged on overnight balances, therefore investors need to close out the position before close of trade – which matches the strategy’s philosophy.

Technical analysis is a form of analysis which seeks to make judgements about the performance of a share based solely on its historic and current price behaviour and without reference to the underlying business, the sector the company is in, or the economy as a whole. This is done by tracking and charting the company’s stock price, volume of shares traded day to day, both on the company itself and also on its competitors. (http://www.cperformance.com/glossary.htm)

The theory behind it states that historical price movements can indicate the psychology of the traders on the market and predict the future. Technical analysts use various share price charts and “indicators” to assist in determining the trend of the specific. The analyst is also not concerned with why the stock is moving, but the way in which it is moving. This form of analysis is popular with day traders as it is typically a short to medium term trading strategy that aims to provide the investor indicators of when to enter and exit the market.

Fundamental analysis is the opposite of technical analysis in that it maintains that the markets may misprice a security in the short run but that the ‘correct’ price will eventually be reached. Profits can be made by trading the mispriced security and then waiting for the market to recognize the "mistake" and reprice the security (Wikipedia).

Fundamental analysts examine the financial information provided by each company, as well as the industry and the economy in Australia and overseas. Essentially, all factors which have an impact on the company. This then provides a sound picture of the performance of the company and the resilience against downturns. This is then used to value the company, and used to compare with the price in the share market. When looking at the data available, fundamental analysts do not try to predict the share price in the short term, as it is volatile; they are concerned with the long term value – which is linked to a long term investment strategy.

Fundamental analysis is used most widely by financial professionals as it looks at the all aspects of the company. This was previously difficult as the information available was difficult to compile because of the sheer volumes. With the assistance of computers, much of the relevant information can be gathered quickly and easily (e.g. Bloomberg).

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