Successful investing includes studying the past. Although the future is obviously different from the past, there are analogies and one can learn mistakes that other people have made in the past and avoid them. One can also learned what has worked in the past to better invest in the future.
Investing Styles That Have Worked in the Past
- value investing. I.E. the Warren Buffett school. Value investing is the art of looking for undervalued companies and trying to buy them for cheap to give an investor room for error in case his calculations don’t work out, i.e. a margin of safety. This often includes looking for good companies that the market for some reason isn’t giving enough credit to. If something bad were to happen to a company, for example, and there is a lot of panic selling and the stock fell below its fundamental price and gives a value investor a margin of safety, the value investor might step in.
- growth investing. This is where an investor looks for rapidly growing companies with large end markets, good management, and competitive advantages and tries to get in on the action. Although growth companies are normally priced at rather high P/E or forward P/E ratios, they could be worth it in the long run if excellent growth continues.
- activist investing. This is the Carl Icahn school, where the activist buys shares and agitates for moves from management to unlock value either through sales of business segments, dividend raises, big buybacks, spin-offs, etc. The downside of activist investing is that normal investors can’t really do it as they don’t have the financial resources. Normal investors can buy shares along with activists, however, after the activists go public.
- speculating early in bubbles. This is the George Soros school of thought. Soros has played many bubbles from gold to internet stocks. Many investors believe the natural order of the market has been bubbles blowing and popping and new bubbles taking their place.
- bonus: trend following trend following has shown to be successful in the past, as it keeps investors in winners for longer. The trick obviously is determining when to get out if there is a drawdown (which will happen eventually)
In conclusion, there have been many investing styles that have worked in the past. Whether they will work in the future is to be determined, however.
Disclosure: no positions