Investment Strategies

I could spend uncountable hours describing all available strategies, and still not cover most of them. It's the most complicated topic.

However, I will try to give you an overview of a few of them, to get you started.

-- growth vs. value vs. momentum vs. income

As you can see, I separate the investment strategies into 4 major categories. It does not mean you should choose the only one. You can combine them based on your investment goal and personal financial situation.

The first two strategies are for long-term investors who have many years until retirement. The last one is mostly for retirees and pre-retirees but may be combined with other categories (the way I do it).

And momentum investing is a completely standalone strategy because the investors use frequent trading (including day-trading) based on the market and certain stocks movements. This strategy can be applied at any age (by retirees, but very carefully, or young investors).

GROWTH INVESTING

Good companies cannot survive for a long time unless they grow by increasing their value, earning, and capital. When you invest in growth companies (ex: all blue chips like AAPL, FB, AMZN, LMT, JNJ...), you expect them to increase in value. So, if you bought AAPL for $300 a share, you are expecting it to grow up to $400, $500...

It's up to you to sell the stock on profit or hold for the long term depending on your trading rules and personal circumstances.

That is an idea of growth investing in short.

VALUE INVESTING

This type of investing requires a thorough analysis of the stocks to filter down the "out of favor" companies that still have a strong business model, smart management, and good prospects in the future. It is the strategy used by Warren Buffett.

Keep in mind that you should be comfortable with the timing as you may wait for the positive outcome from several months to even several years.

In many cases, you can locate those companies in the out-of-favor industries (like material and energy until recent changes). And because of the market rotation when some industries are leading the market but then yield the leading role to another one, initially, the industry will be viewed more positively by the investors as they seek undervalued companies to buy and take profits from overvalued investments.

Since I have retired, I am not looking for value companies that might have a long time horizon to deliver the profit, but I am looking for the income that will add to my Social Security benefits.

And here we come to dividends.

INCOME INVESTING 

Why do you need an income? Silly question, right?

The add-on income (or call it a passive income) is a "must-have" for every investor and non-investor if you want to achieve financial independence. It becomes even more important for retirees. It is a known fact that to live on Social Security benefits only is not possible unless you emigrate to any of the third-world countries where living expenses are much lower than in the U.S.

Therefore, it's all comes down to collecting the income in a form of dividends if you invest in dividend stocks or funds.

MOMENTUM INVESTING

I use this strategy very often by combining it with income investing. What is a momentum strategy? To put it simply, it's buying or selling the stock based on a chart setup. As I have mentioned in my previous article on how to start investing in the stock market, one of the "must-have" skills is knowing how to read and interpret charts.

When you think about learning to invest, my suggestion is to remember that it's fun, too, beyond all seriousness of that business. I have a great pleasure looking at the stock chart formation and interpreting what's going on with the stock. If you understand all those nitty-gritty ups and downs, you know when is the right moment to buy or sell.

You look at the daily volume, multiple indicators, trend lines, and make a decision. With Momentum trading, you usually hold the stock for a shorter period of time than with the growth strategy. It could be from 7-10 days up to several months until the stock reverses the direction, and you sell it. The opposite occurs if you are shorting the stock (you cover your short holding by buying it back).

If You Want Thrills, Then Trade. If You Want Wealth, Then Invest.

Crypto-Speculation in Very Simple Terms.

Now, let's talk about a new type of investing that is making the headlines on the web daily. Yes, I mean cryptocurrency and blockchain. I can bet that many readers might not agree with me, but, hey, it is my personal opinion based on observations.

First of all, let me define one thing, so, you will be clear about what to expect.

• There are investors who are building a long-term portfolio and hold the stocks and funds for a long time. They carefully research the stocks and funds and are buying some based on fundamentals and market conditions.
• There are traders who trade the stocks frequently (sometimes on a daily basis). They are looking for quick profits based on momentum and chart formation, and usually do not buy the value stocks because those may appreciate only if to hold them for a long time.

In both cases, the investors and traders are relying on knowledge of the companies, their valuations, earnings, expenses, management, and much more.

• There are also speculators or gamblers who bet that particular stock or currency will go up or down depending on their strategies and expectations.

As you know, betting on something is similar to casino gambling because (like the case with cryptocurrencies) you don't have any company behind it that you can evaluate, read the publicly available SEC statements quarterly about profits, and have enough data to make a decision about buying or selling the shares of the company.

It also reminds me of the infamous "gold rush" time of 1849 that was a cause of "gold fever" that brought an onrush of miners seeking their fortune. While gold mining itself proved unprofitable for most diggers and mine owners, some people made large fortunes. Many lives were lost, and many people have lost everything they had thanks to thieves, murderers, misfortune...

Crypto- or blockchain creators do not release shares for public trading. Instead, they release "coins", and some of them are so cheap that the trading volume can reach billions and just $1 may buy millions of coins.

There were attempts to bridge the gap between cryptocurrencies and the real world. "Stablecoins" bridge the worlds of cryptocurrency and everyday fiat currency because their prices are pegged to a reserve asset like the U.S. dollar or gold. Read more here…

Cryptocurrencies trading, while I see good prospects for future technologies, reminds me of a casino with many playing tables and a bunch of players around each table. The popularity of each crypto depends on the number of players attracted to the table. Then more players than more bets to the degree when the price of each coin may jump up or down 30-40% within a very short period of time. The same happens with cryptos. You will need to sit next to your monitor or smartphone 24x7 if you want to catch the spike (the trading is going on 24 hrs a day, not like the stock market). So, there are very few winners and a bunch of losers.

So, how the players are being attracted? Rumors, articles on the web, by Twitter and Reddit posts and comments.

Folks, it is driven by rumors, promises, and by successful trades by single individuals (truthful or fake), so, the guys are trying to repeat their success by throwing thousands of dollars on newly issued cryptos betting that they might increase someday by 1000%. The crazy thing is that plenty of guys is throwing money on cryptos to the degree that affects their well-being. The wives are frustrated, the family scandals are not a rare occasion. Basically, it's gold rush #2.

There are no underlying strengths and values that are known for the stocks. The speculators are relying on rumors and promises of crypto creators, on some industry news related to the future of cryptocurrency and blockchain technologies. Some of the cryptos are the jokes (i.e. dogecoins, or meaningless NFT images).

So, I want to be clear: if you want to play with crypto, know that technically you are in gambling, not investing or trading.

Don't get me wrong, as I said at the beginning of this article, I see the promises in the new technologies based on blockchain and the bitcoin (or something similar) that will free the world from the governments' big eye and the desire to empty your pockets.

Frankly, I was staying shy of crypto and became involved just about 3 months ago after seeing that major companies (even from the financial industry) began investing in crypto and blockchain technology because they found the potential to improve their bottom line.

If you are serious about investing your hard-earned dollars or euros, my recommendation is to allocate no more than 10% of your assets to the crypto industry. Reading the posts on the Internet, I found that a big number of people have lost their sense of risk. Most of them will regret their actions; a small number of them may be luckier.

You still have time to stop the madness; take a step back and make the right decision. First of all, stop throwing every dollar you have in the saving or trading accounts into the cryptocurrencies. Allocate a small amount for gambling only.

The safe way to invest (not gamble) into this new frontier is to invest in big players who invest in crypto and blockchain technologies. Yes, you won't become a millionaire overnight (that is a crazy dream of many unsophisticated folks) but you won't lose your pants overnight as well.

Don't be like those kids that don't know where they are throwing money into. Try to learn as much as you can about each technology or coin. There are some new coins every day. It's easy to get lost among hundreds of coins. The price swings can make you happy or sick, depending on the outcome.

I will not teach you how to buy and store your coins or explain hundreds of new crypto terms. But I will provide several links to the articles and applications for smartphones that explain everything step-by-step.

I want to caution you in advance. It's not going to be very easy because the crypto and blockchain world is quite technically complicated.

Start with the basics, and slowly move to the specifics. Just don't jump in the middle in order to figure it out. You will feel like being thrown in the ocean, and God help you not to be drawn.

The Bottom Line

So far, cryptocurrencies are an unregulated world but with a very promising technology that may change the world as we know it. Even more, many financial experts believe that Bitcoin (the very first coin) may be a good hedging tool against terrible inflation INSTEAD of traditional hedging with gold.

Some Suggestions

• One of the most important books on trading is Van Tharp's aptly named Trade Your Way to Financial Freedom. He gives equal weight to the work of philosopher Karl Popper, the psychologists Daniel Kahneman and Amos Tversky, and leading trading system programmers.

But his most crucial insight comes down to this...

There are probably hundreds of thousands of trading systems that work. But most people, when given such a system, will not follow it. Why not? Because it doesn't fit them. One of the secrets of successful trading is finding a trading system that fits you.

The most crucial step in finding your holy grail is deciding what you want to trade and how you want to trade it.

If you prefer the nonstop action of the markets, learn to day trade. After all, the financial markets are the best live "video game" available.

If, like Warren Buffett, you prefer a life of "lethargy bordering on sloth," invest in value stocks.

If you are fascinated by high-risk story stocks like Silicon Valley venture capitalists, focus on technology and biotech.

In short, find a trading philosophy that suits you.

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