Which investing style is the best?

In the previous part of the story, we looked at how many stocks should an investor own? Here we explore further different investing styles.

Are you looking to preserve what you have? Are you looking for an income stream to take care of your monthly bills? Or are you interested in opportunities to create substantial wealth? Different purposes require different approaches.

Investing for growth
The primary motive for investing for growth is capital appreciation. This style requires you to pick companies that are either primed for growth or in growth momentum. You should have exceptional analytical skills to succeed with this style. Besides, you should also have the temperament to hold on to your conviction during turbulent times.

From its 52-week high, HDFC Bank has seen its share price fall by more than 30 per cent on nine separate occasions. And yet, its median 10-year rolling return is 25.4 per cent per annum. Would you have had the temperament to hold on to it during such occasions?

There is also money to be made with companies whose growth has been acknowledged by the markets. But these companies often trade at high valuations. So, spot opportunities to enter at a reasonable price.

Investing for value
The basic idea is to ensure capital preservation by seeking undervalued companies. You need to figure out why a company is undervalued and whether this undervaluation will correct.

You will constantly find your views to be different from the market. It is a lonely affair. But if you have perseverance, then you will be rewarded.

Here is an example. After facing some trouble at the helm, Infosys appointed a new CEO in December 2017. If you got your facts right and understood the problems as transient and made an investment in (say) January 2018, your total return would have been around 31 per cent annually compared to Sensex's 13 per cent.

Watch out for value traps. These are companies trading at a low valuation multiple for extended periods of time because their future prospects are bleak.

Investing for dividends
Through dividend investing, an investor looks for a continuous dividend stream and capital gains. But it is important that you focus more on the company paying the dividend rather than the quantum of the dividend. A small but growing dividend in a growing company is more attractive than a company with stagnant earnings but a high payout.

Look at Berger Paints. While its 10-year median-dividend payout ratio is only 32.6 per cent, its earnings per share and dividend per share have grown by 16.9 per cent and 15.7 per cent per annum, respectively. Accordingly, its share price has compounded at 28.8 per cent per annum.

Investing in turnarounds and cyclicals
These niche investing styles require a specialist's touch. If your timing is spot on, then you are in for a treat. But here is where the problem lies. It's very difficult to spot a wealth-creating turnaround opportunity. In the case of cyclical, the importance of timing entry and exit makes it very difficult to profit.

What should you do?
Your purpose, skillset, time horizon and risk tolerance will define what you should do. In general, seek reasonable growth and add value whenever possible. Dabble into turnarounds/cyclical only if you understand the risk and are experienced enough to spot them.

Also in the series:
How many stocks should you own?
What is the right market-cap mix?