#27 The 5 best-known investment styles for equity portfolios

Perhaps you have already heard of «value investing» or «growth investing»? Both are investment approaches that belong to so-called «style investing». However, there are other investment styles such as «momentum investing», «low volatility investing» and «dividend investing».

«Value Investing»

Probably the best-known strategy is value investing. «Value investing» is an investment strategy that aims to identify and buy undervalued stocks on the market. One of the best-known investors to use this strategy is Warren Buffett.

The concept is based on the assumption that some shares are trading below their true value – i.e., are «undervalued». Investors who use this strategy look for companies with solid fundamentals. In other words, they look for companies with a healthy balance sheet and a strong income statement that are being neglected by the market for whatever reason. Such companies are characterized, for example, by stable sales, attractive profit margins and a low level of debt.

The key to success in value investing lies in the thorough analysis and valuation of companies. This is to ensure that the share is actually undervalued by the market and does not appear to be trading at a low price due to fundamental problems in the company.

«Growth investing»

A second well-known investment style is «growth investing». In a way, growth investing is the opposite of value investing, as growth investing focuses on companies that have achieved above-average sales and earnings growth in the recent past.

In contrast to value investing, which targets undervalued shares, growth investors look for companies with strong growth, even if the shares are already trading at a high price. The price of the share is of secondary importance. This strategy is based on the assumption that such companies can continue to expand their market share and increase their profits over time, ultimately driving the share price higher.

«Growth investing» often focuses on new or innovative companies in fast-growing sectors such as technology, e-commerce, or biotechnology. But growth stocks can exist in any sector. A well-known example from the past is the solar cell boom.

«Momentum investing»

Another well-known strategy is «momentum investing», also known as «trend following». This strategy assumes that shares that have performed well in the past will continue to do so in the future, at least in the near future. Followers of this strategy buy shares that are in an upward trend and sell them as soon as the trend reverses.

The aim is to profit from the continuation of an existing trend before the market corrects. Similar to «growth strategies», «momentum strategies» only consider share prices and disregard the fundamental balance sheet and earnings values of a company. However, as momentum stocks are constantly changing, this strategy requires constant trading, which is associated with transaction costs.

«Low volatility investing»

The fourth investment style is «low volatility investing». This investment strategy aims to invest in shares or securities that exhibit fewer fluctuations, i.e., lower volatility, than other shares. «Low volatility» stocks are often found in sectors that are less dependent on the economic cycle, such as consumer staples. People may postpone buying a car during a recession, but they always buy milk and bread, even in difficult economic times. These companies generally generate constant earnings regardless of the economy, which makes their shares attractive to risk-averse investors.

«Dividend investing»

Another common investment style is the dividend strategy, also known as «dividend investing». This involves focusing on shares in companies that pay out high dividends on a very regular basis. This strategy is typically used by investors who are interested in a steady stream of income without having to touch the substance of their investment. It is a good feeling not to have to sell shares and still have a passive income, but this strategy also has its disadvantages, as potential returns are foregone.

The winner among the investment styles

There are other styles, such as large caps and small caps. All of these investment styles are also referred to as «factor investing» because they can be used to shift a portfolio away from the market portfolio and towards a specific investment factor. A so-called «factor tilt». But which investment style is the best? Actually, none at all.

Probably the most popular investment strategy is index investing, which is becoming increasingly popular with investors. Index investing, at least when a market-weighted index is used, is agnostic and makes no such style bets. Instead, investments are made in a broad market index such as the S&P 500 or the SMI and the individual stocks are weighted according to their market capitalization.

This has several advantages:

1. Avoidance of bets: you participate in broad economic growth and avoid betting on individual stocks or on style factors or groups of stocks such as sectors.
2. Reduction of transaction costs: If the price of a share rises, so does its market capitalization and thus its weighting in the index. This means that, as a rule, no reallocation is necessary, which reduces transaction costs.
3. Free stock analysis: The market capitalization of the individual stocks reflects the assessments of all market participants. A synthesis of all equity analysts is built into the index free of charge, so to speak. Index investing can be implemented very cost-effectively via ETFs and index funds.

Are you more of a «value investor» or a «growth investor» or do you completely avoid factor bets? Send me your feedback by e-mail.