When investing in the sharemarket, one of the hardest decisions is deciding what to buy. Different people like different methods so here I will run through some of the popular strategies.
The top down method looks at what is happening in the economy and then which sectors are likely to benefit before choosing companies in the best sectors. After all, the economy simply describes the business environment.
For example, baby boomers are the biggest age group in our population. As they age, healthcare companies are likely to benefit. So in this case you would look at healthcare companies which target this area.
Another example is China and India. Once again they are expected to grow at over 8% this year. The materials sector is likely to benefit from the industrialisation of these countries.
You would then spend time figuring out which stocks are the most likely to benefit.
If you like dividends, this method may have been made for you. The original strategy looked at the 10 Dow Jones Industrial stocks with the highest dividend yields. Using this model, the logic is that a high dividend yield shows that a stock is oversold.
This method can be adapted for the Australian market and this is often called 'Aussie dogs', where you buy the highest 10 yielding stocks in the S&P ASX 50 on the first trading day each year and reset on a yearly basis.
Based on this method, the current picks would be the following stocks and dividend yields:
The problem with this method is that it tends to pick the underperforming stocks instead of the rising dividend amounts. For example, GPT has a large dividend yield because its stock has fallen so much.
Contrarian investing is all about going against the crowd. These are the investors buying when everyone else is selling and selling when everyone else is buying. It assumes that markets move in a predictable pattern. Mostly it's about buying stocks that are out of favour but have good balance sheets and a strong underlying business.
The motto of growth investing would be 'buy high and sell even higher'. This style of investor isn't concerned with the price that they pay for the stock as long as they are confident that they can sell it at a higher price. They are usually looking for companies or stocks that they believe will grow faster than the rest of the economy or market.
This style of investing can be risky if a bubble forms. An example of this is the tech boom where growth investors did extremely well until the bubble burst.
Technical traders look to the charts to get an idea of which stocks are moving in a trend and are likely to continue to do so. It's all about understanding the battle between buyers and sellers. If buyers are stronger, usually the stock moves up and if sellers are stronger, then the stock usually moves down. It's all about looking at the supply and demand of a stock to work out where prices may be headed next.
In the end, I like to take the advice of one of the greatest investors of all time. Warren Buffett says:
"It's better to buy a wonderful company at a fair price than a fair company at a wonderful price."
At the heart of each stock is a business and in the long term, it's that business that drives the stock price.
Happy investing!
Julia Lee Equities Analyst Bell Direct
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