Which investment strategy?

You have probably heard about the theory that if you put a list of all the shares on an exchange on a dart board, and throw darts at the list, you can probably pick a portfolio that performs just as well as someone who picks them using value investment techniques. News papers also like to play down the experts’ ability to pick the right shares. The Age Newspaper in Melbourne, Australia used to run a column in the Business section which chose 6 different people to pick a basket of 10 stocks each and followed them through the course of 10 weeks. Often, the psychic or teenage girl would come out on top.

These types of articles are interesting to read if you are a short term investor, however this does not illustrate the advantages of value investing. To the beginner, you might think that employing a broker is pointless as they most likely perform the same as a random person off the street. This is a fallacy. As you know, getting rich quick inherently means you need to take on additional risk which you may not even be aware of. Value investing which is all about getting rich slow is not easy, but in the long run, people like the world’s second richest man Warren Buffet has used this technique time and time again to succeed.

It is interesting to note that they are disciplined in what they do. Generally, they follow two rules, firstly, they are independence of mind and the second is patience. Independence of mind means they do not follow trends and do not follow the crowds in what they view as a good investment. This means they get to the shares before anyone else discovers them and can purchase them at a lower price. Patience refers to the long term investment horizon. Volatility in share price over a week or a month does not reflect the fundamental value of the share. With the right amount of research and a long term view of 3 to 5 years, value investments should outperform the market.

If this does not sound easy, it is because it’s not. To get some decent returns, you have to do the grudge work and invest some time into effort into it. For those who do their homework, the benefits will pay off and after some time, you will know how to use your tools of the trade to more easily pick high performing shares. Granted, this is not for everyone, your time frame might be shorter, or and you might just want to follow what is popular in the market. There is nothing wrong with following the crowds or following growth shares, as these companies are most likely to be reported in newspapers and magazines.

However do not be fooled into thinking that other investment techniques are easier to understand and get better returns quicker. Keep in mind that because most of the time, markets are efficient, the more profits you make, the more risk is linked to making that profit. Also, if you are trading often, it will require more of your time and effort.