28 November 2012

Zimbabwe: Rand Volatility Down On Global Stocks

Global stocks, the euro and the Asian markets opened Monday's session higher and the volatility of the rand simply died down. Today we shall look at the different styles of investing that focus on companies in different stages of activity. Although one doesn't need to look at one style and of which many investors gravitate toward either value or growth investing styles. Some would argue it's safe to say that growth investors are by definition more aggressive than value investors.

Different investors with different risk profiles use different methods when looking at companies. The first method we are going to discuss is called value investing. Value investors are the bargain hunters on any stock market in the world. What it means is that they are not just looking for low-priced stocks but they are looking for stocks that the market have undervalued and under priced for some reason and that are likely to change in the future.

To be a value investor one has to follow certain rules. These are the golden rules of investors that are used by the majority of fund managers and financial advisors. They are based on the relationship between the current price of the company and certain business performance measures which market participants usually call fundamentals.

Examples include:

Price to earnings ratio (P/E) below a certain limit;

Dividend yields below a certain limit; and

book value per share to certain level relative to share price.

Value investors spend a great deal of time going over the company's financial statements and studying its position in its market before making a decision. They hope to see a winning position and are willing to hold the stock several years for the right circumstances.

The second type of investing is called Growth Investor. The idea behind growth investing is that one should buy shares in companies whose likelihood for growth in sales and revenue is excellent. Growth investors would like to see these two numbers on a sharp upward track year after year. Please note if a company can sustain rapid growth in revenue and earnings, stock price growth will surely follow. Growth investing works well in the short-term and it's not for the faint-hearted. Those who practice this form of investing are usually high net worth individuals or those who have a sizeable investable income and can stomach the short to medium downturns in the market.

By quality I am referring to the nature of the operations the business is in. This involves looking at the company's product portfolio and its resilience to the market or economic fluctuations. Growth investors usually buy into companies that they are convinced are capable of increasing sales, earnings, market share, liquidity and other important business metrics by set amount each year.

Over the long term value investing usually does better than growth investing. One is safe buying assets at a discount, which builds in a margin of safety for your investment. Growth investing usually does better in the short term. Stocks that post consistently high growth in revenue and earnings are often bid up the market. However growth investing leaves no margin for error in most cases because investors often pay top dollar for a hot stock, which means if it fails to perform one quarter, major investors will dump the stock and the price will collapse before you can sell.

Depending on your time horizon and risk tolerance most investors will want a mixture of value and growth stocks in their portfolio. The aim here is to get high quality stocks selling for reasonable prices. Warren Buffet of Berkshire Hathaway is probably the most famous and successful practitioner of this approach.

For more information contact Prodigy Chinanga on 0772753594 or email on chinangaprodigy@yahoo.co.uk

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