Investment Style – what is yours?
One could be a miser, a spendthrift or even a wise man when it comes to personal finances. Similarly, stock investors can be classified based on their investment style.
Investment style is generally determined based on a variety of criteria such as investment goals, investment time line, risk objectives as well as some personal investor traits.
The following are some popular classifications.
1. ACTIVE vs PASSIVE: Active investors are well informed and typically believe in their ability to outperform the market. They actively follow the market and look for various ways to exploit market inefficiencies.
Passive investors are typically very long term investors who invest in stocks that they intend to hold for a long period.
2. GROWTH vs VALUE: Active investors can be either growth or value seeking. Growth seeking investors look for high-growth companies hoping to get a high return on their investment in a short period of time.
Value investors on the other hand look for under-priced stocks or ‘bargains’. Value stocks are typically identified through fundamental analysis techniques.
Are you a regular investor? What is your investment style?
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What about ‘exploration’ vs ‘exploitation’? Exploiters follow others’ investment strategies and recommendations whereas explorers set the trend by investing in what might look like obscure bets initially. Neither strategy is good to practice exclusively – I am (80% exploitation, 20% exploration) for instance.
Amit,
Yes, those can be thought as investment styles as well. Explorers have a high risk appetite while exploiters are typically risk averse and tend to follow or imitate investment strategies.
It is a good point to note that your investment style is a combination of different styles. This is often the case, but typically one of those styles will be dominant in most investors.
KH