Popular Stock Investment Strategies

Investing in stocks is one of the most popular options for participants in the stock market, regardless of their capital size or experience. Beginner investors are often attracted by promotional materials that highlight the low risks and relatively high returns of investing in securities. Additionally, the possibility of receiving dividends, which creates the illusion of increased profitability of securities, acts as an extra incentive. However, if you hope to profit from stocks, you should understand that achieving success through sporadic selection of assets and an unsystematic approach to portfolio management is impossible. To truly achieve your investment goals, you must use one of the popular stock investment strategies.

Types of Strategies for Investing in Stocks

Investing in stocks can help achieve various investment goals. Since investors’ objectives are quite diverse, there are also many strategies for trading these assets. To organize the information somewhat and make it easier for participants to choose, we will discuss their classification based on several criteria:

• By investment duration, which is divided into short-, medium-, and long-term stock investing.
• By desired return and acceptable level of risk. According to this classification, aggressive strategies aim for returns of over 50% per year with high risks (often nearing 90-100%). Moderate strategies set more reasonable goals with returns of 20-45% and limited risk by investing in reliable assets. Conservative strategies are suitable for investors targeting annual returns of 10-20% with nearly risk-free investments.
• By management method. This includes strategies for self-directed trading and managed accounts. The former can yield higher returns by reducing costs and offering a wider range of investment tools but require time and a certain level of knowledge and/or experience. The latter involves handing over management to market professionals who ensure a balanced selection of assets for a higher probability of positive results. However, the returns of stock market strategies are further reduced by management fees and commissions.
• By investor activity. Strategies for passive investors involve forming a portfolio once and periodically managing its structure (rebalancing) over time. Investing in stocks for active investors entails frequent changes to the portfolio’s structure during the investment period. Transactions with securities are much more frequent and usually respond to market changes or other factors.

Overall, all stock trading strategies, regardless of their group, must address two main questions:

1. Asset selection for buying/selling.
2. Portfolio management principles throughout the investment horizon.

Real Strategies for Investing in Stocks

It is believed that buying securities is one of the simplest ways to work in financial markets while also providing substantial returns. However, stock investment strategies can range from being straightforward to requiring a certain knowledge and skills.

Buy and Hold

The “Buy and Hold” strategy is considered the simplest and is effective even for stock market beginners. The name itself describes the principle: the investor buys stocks and holds them for the entire investment period.

This strategy is based on three main principles that have been effective in the stock market for decades:

1. In the long run, the market grows. This is evidenced by the price charts of major indices — even after the deepest crises, such as the Great Depression, the dot-com crash, and the mortgage crisis, the market recovers and reaches new highs.
2. An active trader always loses to the market. This isn’t due to exchange commissions and taxes but rather the nature of trading itself. Traders receive signals to open and close positions only after price changes occur. This means they miss out on profits due to lagging behind the best entry and exit points. Therefore, those who simply follow the market by holding securities remain at an advantage.
3. It’s impossible to lose everything in a broad market. While some assets may incur significant losses or become worthless during crises, and the market as a whole can be unprofitable, the entire market cannot fall to zero. Thus, after a crisis, investors can expect new highs (see point 1).

Important! These principles show that the essence of the strategy is to hold onto purchased securities rather than focusing on the precision of asset selection. However, a proper approach to portfolio formation can significantly increase returns.

Such equity investment techniques are almost always used by Warren Buffett, who states that the optimal holding period for stocks is forever. He offers several tips for selecting issuers to implement Buy and Hold:

• A unique product or technology that provides a competitive advantage.
• An ecosystem that actively works on attracting and retaining users.
• Cost advantages in production that significantly reduce expenses.
• Scalability potential for both the business and its customer base.

Naturally, it’s essential to carefully study the company’s business and assess its prospects. Another important condition that nearly all adherents of the strategy follow is the regular payment of dividends.

Money-cost Averaging

This strategy also belongs to popular investment methods. However, it is mainly aimed at market participants who have available capital or regularly increase the balance of their investment accounts.

Its essence can be summed up simply: you can buy stocks regardless of the market situation, either at a set frequency or when prices change by a certain amount. As a result, you will acquire a portfolio of securities at an averaged price, potentially achieving higher returns.

This strategy works particularly well during market declines, at local minimums. It allows for purchases at prices close to the best possible and entry into the market without delay. The main drawback of this approach is the need to endure drawdowns during unfavorable developments, which can be quite prolonged. Therefore, patience and, of course, available funds are necessary.

As with “Buy and Hold,” this strategy is also simple to implement and focuses not on the stocks themselves but on the market entry technique. Nevertheless, selecting securities with high growth potential for this strategy can significantly boost returns.

Dividend Investing Strategies

Dividend investment strategies are also among the simplest options for investing in the stock market. This strategy involves including only the securities of issuers who consistently distribute a portion of their profits to shareholders.

The advantages of this strategy include:

• Steady cash flow. This can be received and reinvested.
• Simplicity of asset selection. You select securities based on their dividend history rather than growth prospects.
• Accelerated capital growth through reinvestment. This is due to compound interest.

However, it is important to remember that dividend payments, even if stated in the company’s policy, are a right, not an obligation. Therefore, there is always a risk that the issuer might stop paying dividends. Another factor to consider is the dividend yield and the company’s reliability. Sometimes, issuers with poor performance metrics offer high dividends to attract investor interest and capital.

Note! Although dividends are typically seasonal (paid by companies at specific times), with careful selection of stocks, you can implement a variant of the well-known “Wheel” strategy with dividend stocks, which significantly accelerates compound interest accumulation. In this case, select stocks to ensure monthly (from different stocks) or at least quarterly dividend payments.

Value Investing

Value investing is one of the most effective strategies for the stock market. However, like many of the best investment strategies, it is quite complex. Warren Buffett summarized its main idea succinctly: the optimal choice for an investor is to buy good stocks at great prices. This approach involves selecting assets priced below their intrinsic value.

Value investing typically does not focus on specific market situations or trends. This is because undervalued assets already have growth potential — at least up to their intrinsic value. Other assets require an additional powerful driver for price growth.

The investor’s task in this strategy is to identify promising stocks for purchase using valuation methods. Such stocks typically include:

• P/E Ratio Below Average, P/B Less Than 1.5, and a Capital-to-Debt Ratio Above 2.
• Priced No More Than 70% of the Calculated Value, which is determined by the company’s total or net asset value.
• Existence of the Issuer for at Least 5 Years and Positive Profit Dynamics Over This Period.
• Price Decline Due to Market Processes or Fundamental Economic Factors, not related to a loss of company profitability.

Note! This strategy easily combines with Buy and Hold. Indeed, if you correctly select value stocks, they will continue to grow over a long period. You should hold them throughout this time.

Investing in Heavyweights

This strategy involves purchasing securities from issuers with the largest market capitalization. The simplest approach is based on statistical data, which show:

• During stable economic periods. These companies drive index growth, significantly reducing the investor’s underperformance relative to the broad market.
• During recessions and crises. They demonstrate maximum stability, significantly reducing losses for their shareholders.

Note! This method works well in short-term stock trading too. The market never moves in one direction continuously; upswings are followed by corrections. In these waves, heavyweights play a significant role, and their stocks can bring substantial profits relatively quickly.

Investing by Greenblatt’s Magic Formula

Greenblatt’s Magic Formula is a variant of value investing but differs in its methodology for selecting stocks. The evaluation is based on two indicators: return on capital (ROC) and earnings yield. The general process for selecting companies is as follows:

1. Calculate the ROC and earnings yield for companies.
2. Rank companies in descending order for each metric (creating two separate lists).
3. Assign a score of 1 to the company with the highest ROC, increasing the score for each subsequent company. Do the same for the earnings yield list.
4. Sum the scores for each company. Select 25-30 stocks of issuers with the lowest total scores for purchase.

Important! Companies in the financial sector, issuers with small and medium capitalization, insurance businesses, and utilities are not considered.

Portfolio restructuring is conducted annually.Rebalancing is possible once per quarter.

All the mentioned strategies allow for relatively high returns with low levels of risk and are primarily moderate and conservative. Most of them involve medium- and long-term investing.