Investing right: The difference your approach can make to your portfolio

Investing is an art form. Every investor has their own approach and strategies, varied risk tolerance levels, capital preferences and time frames. Even the types of investments might differ. Whether one opts to invest in the top 50–100 firms or chooses to diversify and stand apart from the crowd, what shapes one’s portfolio is their investment approach. While the wise investors among the lot take decisions based on economic principles, those who are wiser, combine economics with psychology and make conscious decisions to reach their ultimate goal.

Since a person’s investment decision is connected to their psychology, which, in turn, is affected subconsciously by narratives, there can be no real guarantee that an investor’s portfolio will be in the green all the time. There are certain investment approaches that can keep you a foot ahead of the headwinds, or at least help you stay prepared.

Value investing: One of the soundest approaches to investing, the value investment philosophy is both simple and profound. It is the practice of buying stocks of sound businesses at a discount to their intrinsic value. An objective approach to value investing requires investors to make their investment decisions based on business fundamentals and research.

The true test of value investing, though, comes from the fact that the strategy requires one to take absolute control of one’s emotions while investing. Behavioural biases, emotional attachment to certain investments, and overreaction to temporary news are some of the pitfalls that the value investor needs to avoid in order to emerge successful.

Momentum investing: A momentum approach to investing is when asset managers invest in financial assets such as stocks, indexes, derivatives, bonds, or commodities that are on the upward trend given their strong recent performance while selling those that exhibit poor returns. The strategy is based on the belief that the assets that have been performing well in the recent past will continue their upward momentum. The core premise of this approach is that once market trends have been established, they tend to persist for a while owing to factors such as investor psychology, herding behaviour, and information dissemination.

Through this approach, asset managers can choose to follow or avoid turbulent market trends in order to take advantage of the market’s own momentum. A momentum approach to investing can be a profitable strategy for asset managers who can identify and exploit market trends and momentum factors.

Growth investing: It seems to be similar to value investing. According to Warren Buffet, growth investing and value investing are joined at the hip. However, if seen objectively, a growth investing approach is when asset managers invest in a company that they believe has yet to reach its full potential. Growth companies, in this regard, are those that have the potential to give higher returns than the market. A research-intensive approach, asset managers can look at some key factors when selecting companies, such as strong historical earnings growth, impressive forward earnings growth, robust profit margins, a solid return on equity, and strong stock performance.

Growth investors ideally look for companies that they deem innovative, disruptive, or have a competitive advantage in their sector, and that can generate high earnings growth, revenue growth, or cash flow growth in the future.

In order for a growth investment approach to work, asset managers need to have a clear vision of macroeconomic trends that will be responsible for driving the growth of a certain sector or market in which the chosen company operates.

Blend investing: An investing approach that straddles both value investing and growth investing, blend investing is when asset managers invest in companies that have both growth potential and value attributes, such as solid fundamentals, steady earnings, and reasonable valuations.

The approach has a number of advantages, namely helping asset managers diversify their portfolio along with balancing their risk and return objectives by combining low-risk and high-risk assets. Such an approach is beneficial to asset managers as it allows them to adapt to changing market conditions and opportunities. While a sound strategy, the blend approach has its own traps that asset managers need to look out for, namely, that it might now always be easy to locate assets that showcase both value and growth. Additionally, there might not be a clear benchmark available that reflects the objectives that the asset manager has in mind.

While there are innumerable approaches, adopting the right investment psychology plays a very important role in one’s journey as an asset manager. It is critical to manage emotions such as greed, fear, regret, and hope and be objective about one’s investment decisions. Self-awareness and emotional resilience are the moulds that shape a stable investment philosophy. The aim should be to maintain a risk-adjusted, steady portfolio that should not be swayed by emotions when the market seems like a roller coaster.

Rajnish Girdhar is chief executive officer, Karma Capital