How to profit from shares
Why you need an investment strategy
|
Value investing is one strategy that has worked well over time and has a large following at the Fool. Simply speaking, you buy shares when they appear cheap as measured by a few financial ratios such as P/E and yield. And then you sell the shares once they become more expensive.
Of course you can also employ a small combination of strategies. Our Champion Shares newsletter uses this approach. It is written by Maynard Paton (TMFMayn), who previously ran the Qualiport online portfolio on this website for several years. Read this introductory guide for more details.
Other popular strategies include focussing on a particular sector of the market that you know well. The idea here is that by researching an area in depth you'll gain an edge over other investors in the market. Closely related to this idea is the idea of 'top down' investing. Here you identify a sector which you think will benefit from a major trend, and then pick the best companies within that sector.
One approach we don't favour at the Fool is charting or technical analysis. This is the practice of using price charts, and other technical data like the volume of shares traded, to predict what will happen in the future. Not everyone agrees with us, and that's fine, but we don't think it really works for shares. You end up buying and selling too frequently, hence racking up expenses that eat into your returns. For similar reasons, we're not overly fond of strategies that use a stop loss, which is when you automatically sell your investment should it drop by a certain percentage from your buy price.
Finding the strategy that works best for you is likely to involve some trial and error. You'll probably have to experiment with a few different ones before you settle on the one you prefer. The world of investment has its fashions so sometimes some strategies work better than others. Indeed, when the stock market is rising most strategies will do well. This is why it's a good idea to benchmark your performance against the overall market. This way you can see if all your effort was worthwhile and it can help you make sure you don't attribute your investment success to skill rather than luck.
© Copyright 1998-2006, The Motley Fool Limited. All rights reserved
