The Best Strategies for long term investments (Guide for Beginners)
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When stocks are held for a duration of more than one year, it is usually referred to a long term holding or long term investment. But one year is also an extremely long time for volatile and price sensitive markets as stock prices can shoot up of fall down drastically within this time frame.
In such cases. Stocks have to be chosen very carefully. There are many strategies in the market which can be deployed for picking the right stock for long term investment. These strategies have been formulated and developed over the years by legendary investors and experts of financial markets like Warren Buffett, Peter Lynch, Robbie Burns, Benjamin Graham, Joel Greenblatt etc. The basis of these strategies which when put to use for choosing stocks for long term, almost always gives us a recipe of success.
Let’s look at some of these philosophies which you can use to pick stocks for long term investment.
The Best Strategies for Long Term Investments
1. Value Picks Strategy
Value investing is an investment strategy where stocks are selected that trade for less than their intrinsic values. It is generally seen that market overreacts to good and bad news, resulting in stock price movements that do not correspond with a company's long-term fundamentals, giving an opportunity to profit when the price is deflated. This value buying strategy based stock selection gives good upside return potential in the long term. You can pick stocks based on their intrinsic value when it is above its current market price. Such a strategy of picking stocks is called Value picks investment strategy.
2. The Naked Trader Strategy
"The Naked Trader” is a famous investment strategy book by Robbie Burns which focuses and delves deeply into growth investing strategy. In this strategy stocks are exclusively selected on the basis of strong growth and earnings in the recent past. Other factors are also taken into consideration like the price momentum and value, and focus is placed on small and mid-cap stocks. High leverage companies are avoided in this selection process as it affects the profitability and return on equity of the company. Stocks are also screened on valuation parameters like PE, EV/EBITDA, P/BV ratio, so that reasonably priced stocks are selected. You can choose this strategy for adding to your kitty high growth stocks.
3. The Intelligent Investor Strategy
Benjamin Graham, also known as the “father of value investing” set out some important stock-picking criterion in his book “The Intelligent Investor”. The strategy which corresponds to the mantras highlighted in this book applies the few criterions to stock selection like companies with low Debt / Equity Ratio and high “Earnings to Fixed Charges” ratio indicate long term solvency and the soundness of long-term financial policies of the company. Graham emphasizes the use of “price to book value” ratio for picking up undervalued companies which are showing future growth prospects in terms of Earnings as well as Cash Flows.
4. Peter Lynch’s Theory
Peter Lynch’s stock selection strategy is based on investment criteria set out by the great investor himself, in his book "One up on Wall Street". Companies having high EPS growth in the recent years are expected to continue with a sustainable growth rate in future. Also, a low debt/equity ratio along with a higher interest coverage ratio leads to a high return on equity which gives good return in the stock market. In this strategy, stocks are selected based on high earnings growth, high operating cash flow growth, and their valuation multiples. Companies are further screened based on their PEG Ratio (P/E Ratio to Growth Multiple), a multiple coined by Peter Lynch himself, as high growth companies continue to perform better even if they trade above their sectorial P/E Ratio.
5. Warren Buffett’s Way
Warren Buffet is perhaps the most well-known value investor. Value investing is an investment tactic where stocks are selected which appear to trade for less than their intrinsic, or book values. Value investors actively seek out the stocks they believe the market has undervalued. Investors who use this strategy think the market overreacts to good and bad news, resulting in stock price movements which do not correspond to a company's long-term fundamentals. This overreaction gives the value investor an opportunity to profit buy stocks at a deflated price. Undervalued stocks are thought to come about through investor irrationality. Warren Buffet Value investors hope to profit from this sort of irrationality by investing in companies which may have any combination or one of below average price-to-book ratios or lower than average price-to-earnings (P/E) ratios or higher than average dividend yields.
6. Growth and Dividend strategy
This stock selection strategy was developed by Kevin Matras, an US based investment expert in his book "Finding #1 Stocks: Screening, Back testing and Time-Proven Strategies". Companies having high return on capital employed will be able to manage endurable earning growth. High return on capital employed with low debt/equity ratio leads to high return on equity which gives good return in stock market. In Growth and Dividend strategy, stocks are selected based on high return on equity in the same sector. Companies are further screened based on their P/OCF (Price to Operating Cash Flow) instead of just PE ratio. High operating cash flows gives a company the ability to sustain earnings growth.
7. Greenblatt's Magic Formula Investment Strategy
The “Little book that beats the stock market” written by Joel Greenblatt's talks about value investment strategy. The books discusses about higher return on capital employed which leads to higher profit earning. Return on capital employed measures the profitability and efficiency of the company. This Neuron is built by applying the Magic formula as described in the book, with special emphasis being given on those stocks which are trading at reasonable price for long term portfolio.
Conclusion:
All these strategies when deployed in the stock markets for a long term minimizes the risk and have potential to give returns beating the index. However, it is important to keep a regular check on the investments and also to follow to target and stop loss for strategy based investments.
Author
CapitalVia
Pioneer in Investment Advisor
