There are many different investment strategies for putting your money to work: growth, value, penny stocks, dividends, momentum, index funds.
There are so many that it’s easy to get confused if you don’t have a clear view of them.
When I talk to other investors, I often notice that in the same conversation they mix up different strategies without realizing it.
Maybe because they got a “hot tip” from another investor, without knowing that investor follows a completely different strategy with their stocks.
The worst thing you can do is jump blindly from one of these investment strategies to another.
Finding the Right Investment Strategy
A year and a half ago, at the annual meeting of my fund, Grünbaum Value Invest, someone asked me why I hadn’t invested in Rheinmetall.
That’s ammunition, weapons, armored vehicles and air defense.
Just a few years earlier, weapons stocks were almost as off-limits as child labor or tobacco. But the mood had shifted, and shares in weapons manufacturers were soaring. Rheinmetall’s stock had risen more than 1,000%.
Specifically chasing weapons stocks would be a thematic strategy, and that’s not what my fund is mandated to do. My fund invests in value.
And there’s a catch. Once a theme has become a theme, once it’s what everyone is talking about in financial newspapers and podcasts, it’s often already too late.
What does that mean? The stock has become overvalued.
Here’s an overview of the different investment strategies you can choose from:
Momentum
Momentum is one of the more popular investment strategies, and it’s about following the flow.
You buy stocks that have already risen a lot, because you believe the rise will continue. The logic is simple: a stock in motion tends to keep moving.
There’s something appealing about it. You don’t need to understand the company’s financials. You just need to be able to read a price chart and have the courage to jump on the wave.
The downside is even bigger, though. The problem arises when the wave turns.
Momentum is driven by psychology and herd behavior, not by what the company is actually worth. You never really look at the reality behind the business. Does it have profits? Is there growth? Is it a good product? None of that matters in this strategy.
When fear takes over from greed, a momentum stock can fall just as fast as it rose. The higher you fly, the harder you fall, as they say.
You also have to time your exit precisely. When is the party over? No one knows for sure, and many momentum investors end up holding stocks that have dropped 50-70%, because they waited just a moment too long.
Penny Stocks
Penny stocks are shares that trade at very low prices, often in small, unknown companies.
The bait is obvious: people think, “it only costs a few cents, how much lower can it go?”
But a low price says nothing about how cheap a stock really is. If it falls to zero, you’ve lost 100% of your money, whether you started at a few cents or a few hundred dollars.
What determines whether something is cheap is the relationship between the price and what the company is actually worth, not the number on the price tag.
The upside? I don’t know of one.
The downside? You’re fumbling in the dark with a reckless strategy.
Day Trading
Day trading is a completely different discipline.
Here you buy and sell within the same day, sometimes several times an hour. It relies heavily on technical analysis, reading price charts and reacting to patterns within hours, sometimes minutes.
The upside? If you want fast cash, you’ve made some money before the day is over.
The downsides are many, in my view.
It’s effectively a new full-time job. You have to sit ready and react, and decisions must be made quickly, with no time to think things through properly.
It’s also very risky. Most studies show that the vast majority of day traders lose money over time, and that fees and taxes eat up a large part of any potential return along the way.
Growth Investing
Growth investing is one of the most widespread investment strategies, and here you buy shares in companies that are growing quickly.
Revenue rises sharply year after year, and the market expects that to continue for many years to come.
Think of the big tech companies that many people have profited handsomely from in recent years.
The challenge is that all the future growth is already baked into the price. You’re not paying for what the company is worth today. You’re paying for a story about what it might be worth in ten years.
If that story doesn’t come true, the stock falls hard. The more growth the market has expected, the harder the fall tends to be.
I’ve seen it happen again and again: a beloved growth company disappoints just slightly in a single quarter, and the stock plunges.
That’s naturally the downside.
But there’s a solution. We’ll get to that.
In principle, I have nothing against companies with growth and other healthy numbers on the balance sheet, quite the opposite. What I do have something against is overpriced growth companies.
Dividend Investing
Dividend investing is one of the more defensive investment strategies: choosing companies that pay out part of their profits as a regular dividend, ideally one that grows year after year.
It’s a popular strategy, especially among investors who want an income from their portfolio.
The upside is that you get cash in your account at regular intervals. That can create a sense of security and money to cover expenses.
The downside?
A high dividend isn’t necessarily a sign of health.
Some companies pay dividends even when the business is under pressure, because management is afraid of disappointing shareholders by cutting it. A dividend can therefore camouflage problems instead of revealing them.
Even if nothing is wrong, in most cases a dividend can simply be a sign that the company is very mature and doesn’t have much left to grow into.
If they needed to move into new products, markets, or acquire competitors, they would invest in that instead of paying a dividend to shareholders.
Thematic Investing
Thematic investing is one of the more exciting investment strategies: investing in a trend you believe in, for example artificial intelligence, an aging population, cannabis stocks, or weapons and war. You then find the companies that stand to profit from that trend.
The upside: it’s an appealing idea. You don’t have to choose between individual companies, just between themes.
The challenge is that a good theme doesn’t always mean a good investment.
By the time everyone can see a theme coming, the prices of the obvious companies have often already shot up, long before you discover it yourself.
When I got that question about Rheinmetall, the stock had risen more than 1,000% in a few years. But over the past year it’s more than halved.
I’ve seen a fair number of thematic investments wreck portfolios.
Remember when everyone wanted to invest in cannabis stocks because cannabis was being legalized in several countries?
First, companies specializing in cannabis rose extremely sharply, but then they fell quite quickly by up to 90%, and eight years later they still haven’t returned to their peak.
Special Situations
Special situations are about investing around concrete events: divestitures, spin-offs, or acquisitions.
Here you take advantage of the fact that such events often create a temporary mispricing in the stock, because many investors sell or buy based on rules and index obligations, not the company’s real value.
It’s a niche strategy that requires you to follow corporate events closely and understand how they affect the price.
The upside is supposed to be a high return.
But the downside is significant when, for example, the acquisition doesn’t go through after all. I’ve burned my fingers on that once myself, and decided I’ll never place that kind of bet with my money again.
Passive Investing and Index Funds
Passive investing through index funds is probably the simplest of all investment strategies.
You invest broadly across an entire market without picking individual stocks yourself. You simply buy shares in a fund that tracks one of the broad indices, usually the geographic ones like the S&P 500, the Dow Jones, or perhaps even a global index.
The upside? It requires a minimum of your time, and over time index funds have historically delivered a reasonable return.
The downside? There’s a catch that few people talk about.
When you invest passively, you hand the choice of companies over to the index itself. And the index is typically weighted by size.
That means the more overvalued a company becomes, the larger a share of your index it makes up.
You don’t ask yourself whether you’re paying a fair price for the individual companies. You buy all of it, regardless of price.
That can work fine for many years. But it’s worth knowing that you’re effectively giving up thinking for yourself.
And did you know the Dow Jones index fell 80% in 1929? It took 30 years before it reached the same level again.
As I write this, the US stock market is trading far above the level US stocks reached before the 1929 bubble. And yes, it can happen again.
Value Investing
Of all the investment strategies I’ve described here, value investing is the one I trust the most, and the one I’ve chosen myself.
As a value investor, you choose the companies you invest in yourself. You examine what the company is actually worth, and compare that to the price the stock is trading at.
Warren Buffett described it very precisely: it’s like buying a one-dollar bill for 50 cents.
Here’s why I believe this method is stronger than the others.
1. You invest in substance, not sentiment. Where momentum and day trading are about what other investors are doing right now, value investing is about what the company actually earns, and how solid its business is. You don’t depend on others continuing to believe the story.
2. You have a margin of safety. When you buy something for less than it’s worth, you have a buffer if things don’t go exactly according to plan. Growth investors rarely have that buffer. They’ve paid full price for a perfect future.
3. You stay calm when the market falls. When you know what you own and why you own it, a price drop doesn’t become a reason to panic. On the contrary, it becomes an opportunity to buy more of something good at an even better price. That’s harder to say about a momentum stock that’s just plunged, or a growth stock whose story has suddenly become uncertain.
4. You don’t have to guess at psychology. You don’t need to predict whether other investors will keep being optimistic. You just need to be right about the company’s value, and that’s far easier to assess than the market’s mood.
And then there’s one more thing I appreciate about the method.
When you invest broadly through ETFs or index funds, it’s like going to the supermarket and grabbing everything on the top shelf without looking.
As a value investor, you instead look at what you put in your basket, and you know you can stand behind it.
Which Investment Strategy Should You Choose?
If you ask me, the best method is a blend of value and growth.
The best companies I’ve invested in myself have both solid fundamentals and growth in sales and profits.
What’s the difference between A) an ordinary growth investor and B) a value investor with a taste for growth?
The difference is that as a value investor, I always look at what the company is actually worth. Pure growth stocks don’t necessarily do that.
Are there growth stocks that fall? Yes, when the market for one reason or another gets nervous and starts thinking irrationally.
Right now the market is split in two. Anything with even the slightest connection to AI is soaring, while a lot of everything else is falling, almost regardless of whether it still has strong numbers.
It can also happen that the market punishes a company over a single bad quarter with a specific cause, because the company has run into a temporary crisis. For example a leadership vacuum or a bad launch.
When you invest as a value investor, you’ll also experience stocks falling, and you need a steady stomach when you go into it.
But if you’ve read the numbers correctly and chosen an undervalued stock with growth and profit, you can feel confident it’ll likely come back.
Once you’ve understood and chosen your strategy, you can hear a “hot stock tip” and calmly dismiss it.
You can think:
“No thanks. That’s momentum.”
Or: “No thanks. That’s a penny stock.”
Want to learn more about finding a company’s real value? Download my free e-book here. It’s all explained in there.
