When talking about investment strategies, each investor has different goals, therefore, investment strategies have to be flexible and fit different risk levels to meet those goals. In Investor Relations, learning what kind of investor you’re dealing with will allow you to adapt your communication strategy based on the interests and goals set by each type of investor. This week we analyze some of the investment strategies that investors follow.
Main Investment Strategies
It is the most popular investment strategy. Value investors are sometimes called bargain shoppers because they tend to buy stocks they believe are undervalued based on some common metric (Price/Book Value, Dividend yield, Cash yield among others). The idea is that there is some kind of irrationality in the market and because of that, these stocks present an opportunity and can be bought at a “discount”. Value investors see the full picture instead of just looking at the stock’s price. The main idea is to buy businesses, not stocks. In this sense, value investors are usually long-term investors.
Growth investing consists of concentrating in rapidly growing companies with a strong profit growth. Growth investors usually look for features such as solid historical earnings growth, expanding revenues and profit margins. Said companies often reinvest their profits in the business instead of paying dividends to their investors. Growth stocks often trade at high valuations, which to an investor, it’s a treat. There is not a definitive list of metrics, but there are some factors a growth investor keeps in mind, like the stocks outperforming during periods of falling interest rates, management skills and evaluation of the competition.
Momentum investors are often technical analysts because their main belief is that stocks that have already gone up, will continue to go up. Momentum investing radiates in the alleged tendency for stocks to continue in the same direction for several months, hence the name of the strategy. The main risk is that trends can change in an instant, therefore, momentum investors may be exposed to the force of a market correction. The appeal is that it may be possible to implement a momentum strategy without the need for full time trading and research.
Other Investment Strategies
- Socially Responsible Investing: socially responsible investors focus on competitive, environment-friendly companies.. They expect companies to maintain a social conscience, benefiting them and the planet.
- Small Cap Investing: these investors look for up-and-coming young companies that are rapidly growing such as Dillard’s Inc., PennyMac, Anika, among others.
- Contrarian: contrarian investors basically go against the market and wait patiently for it to eventually pay off.
- Income / Dividend: the main focus is on companies that distribute their profits to their investors, meaning that they look for dividend paying shares.
After reading about all the possible investment strategies and the different types of risk and benefits each investor is willing to take, it is important to keep them in mind when writing your IR materials and defining your communication strategy. Also, it is important to understand the type of investor you are talking to when having one-on-ones or calls so you understand which subjects are more important to and be sure to cover them all. As always, in Miranda IR we will be more than happy to help you plan your communication strategy to target a specific type of investor whether they are focused on value, small-caps, momentum, etc.
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