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There are many forms and variations of investment philosophy. A comprehensive study of investment philosophy is beyond the scope of this article. Listed below are just some of the basic ones:
Fundamental Investing (Fundamental Analysis)
This investment philosophy relies on the analysis of the business as the basis of stock selection. It believes that the value of the business is depending on the economic outlook, business growth projection, its assets and liabilities, the financial management of the company and business risk. A stock analyst will study the business and produce a valuation based on the balance sheet and profit and loss statement. If the stock is traded above the valuation in the market then this stock is over-valued and vice-versa.
Fundamental investing ignores the timing of the market and it does not care about market condition as it believes that overtime the stock will adjust to the projected valuation. The investment period is usually in long-term.
Under this investment philosophy, there are a couple of investment strategies.
Value Investing
Using fundamental analysis as the basic philosophy, the strategy of value investing is to select stocks that are undervalued. Fund manager will buy when it is undervalued and sell when it is overvalued. This buy-and-hold strategy usually is used for long-term investment.
Growth Investing
This strategy picks stocks that have higher growth potential and the companies are growing at a fast pace. Such companies may or may not be in a growth industry. Fund manager will buy such stocks even if it is slightly above valuation due to its growing potential.
Large Capital Investing
This strategy only select stocks that have large market capitalization and liquidity. Most of the large capital stocks are mature companies although some of them may be in the growth industry. The purpose of using such strategy is to have a selection of stable companies that can be traded easily due to its liquidity. A lots of pension fund uses such strategy due to its large investment size.
Market Condition & Timing (Technical Analysis)
This investment philosophy believes that what happen on the market is more important that your stock selection. This philosophy uses many technical analysis techniques to study the market in order to predict them. There are many techniques and strategies in the field of technical analysis from the basic charting, quantitative analysis to momentum trading. Most of the technical analyst uses an ensemble of techniques and strategies.
Efficient Market
Efficient market theorist believes that the market is efficient and the market will reflect the true value of the stocks. The most common strategy for efficient market theorist is to buy index stock. Most of the institutional investor uses benchmark as the basis of their investment. The most common benchmarks are Morgan Stanley Capital International (MSCI) Indices, Dow Jones Industrial Average and FTSE.
Contrarian Investment
Contrarian investment believes that in order to outperform the market one should buy when everyone is selling and sell when everyone is buying.
Although some fund managers prefer to adhere to one investment philosophy, there are fund managers uses a combination of investment strategies that are derived from different investment philosophy. For example, some fund managers uses value investing strategy for stock selection and use momentum trading to trade them.
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