NDMC 2023
Investment Strategies
Lesson 5
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LEARNING OBJECTIVES:
After studying lesson 5, you should be able to:
Define Investment Strategy
Identify/Understant the Classification of Investment
Strategy
Classi ication of
Investment
Strate y
f
g
Investment Strate y
• a systematic approach to making
investment decisions based on
principles, guidelines, and rules.
• it involves selecting a portfolio
of investments expected to meet
the investor's financial goals
while considering their risk
tolerance, time horizon, and
investment objectives.
g
Value Investing
• The originator of this
conservative approach was
Benjamin Graham. His pupil
Warren Buffett described
Graham’s methods as the used-
cigar- butts approach-"Well
smoked, down-to -the -nub
cigars but they are free- you
pick them up and get free puffs
out of them."
Value Investing
• His underlying philosophy is
that a value investor buys a
business rather than a stock.
This means that one should
invest in businesses, which
are easy to comprehend,
and where future cash flows
are predictable with ‘clock
like certainty’.
Value Investing
• Deep Value - style uses the traditional
Graham and Dodd approach.
• Relative Value - money managers seek
out stocks that are under- appreciated
relative to the market, their peer group,
and the company's earnings potential.
• New Value - money managers seek out
stocks that are under- appreciated
relative to the market, their peer group,
and the company's earnings potential.
Growth Investing
• a stock-buying strategy that looks
for companies that are expected
to grow at an above-average rate
compared to their industry or the
broader market
• Peter Lynch believes that an
investor can identify great stocks
long before the market does, by
using his intuition, intelligence,
reflection and perseverance.
Example of Growth Investing
• Penny Stocks
• Foreign Currency and
• Real Estate
Classi ication of Growth Investing
• Traditional Growth Style
• Disciplined Growth Style
• Aggressive Growth Style
f
Traditional Growth Style
• Includes stocks, bonds, and
cash. Stocks are shares of
publicly traded companies.
Each share of stock
represents fractional
ownership of a company in
proportion to the total
number of shares available.
Discipline Growth Style
• The ability to stick to a set of
rules and a broad trading plan,
irrespective of the circumstances.
• It sustaining high revenue growth
as a company scales – at least 20
percent a year – that is based not
on short-term gimmicks but on
creating sustainable value.
Aggressive Growth Style
• invests in companies that have
high growth potential,
including newer companies
and those in hot sectors of the
economy.
• As a result, these funds are
actively managed to achieve
above-average returns when
markets are rising.
Sector Strate y
• Is an investment strategy that
invoves allocating assets to specific
indu stries or sec tors of the
economy.
• Look at a particular industry such
as transportation.
• The holdings of this type of fund
are in the same industry, there is an
inherent lack of diversification
associated with these funds.
g
Index Strate y
• A passive investment strategy that seeks to
replicate the returns of a benchmark index.
• Indexing offers greater diversification, as well
as lower expenses and fees, than actively
managed strategies.
• This also tends to track the index it follows by
purchasing the same weights and types of
securities in that index.
g
Global Strate y
• A global strategist builds a diversified
portfolio of securities from any
country throughout the globe.
• refer to investment approaches that
involve the allocation of investment
funds across various geographic
regions of the world, in order to
a c h i e ve a p a r t i c u l a r f i n a n c i a l
objective or goal.
• maymay involve investing in equities,
bonds, real estate, and other asset
classes in different parts of the world.
g
Stable Value Strate y
•Capital preservation
investments (t ypically
separate accounts or
commingled vehicles)
available in 401(k)s and other
retirement savings plans.
• They seek to provide, positive
income and principal
preservation.
Dynamic Strategies
• Involves the frequent
adjustment of the weights in a
portfolio based on the overall
market performance or the
performance of certain
securities.
• Stock and bond components of
a portfolio might be adjusted
based on the well-being of the
economy.
Advantages of Dynamic Strategies
• Performance - investing in the
best performing asset classes
ensures investors’ portfolios
have the highest exposure to
momentum and reap returns if
the trend continues.
• Diversi cation - exposes a
portfolio to multiple asset
classes to help manage risk.
fi
Limitation of Dynamic Strategies
• Active Management - actively
adjusting portfolio allocations to
meet changing market conditions
takes time and resources.
• Transaction Costs - involves
frequently buying and selling
different assets. This increases
transaction costs that reduce the
portfolio’s overall return.
Constant-Mix Strategies
• It maintains an exposure to stocks that is
constant proportion of wealth.
• Dynamic approaches -when the relative
values of assets change, purchases and
sales are required to return to the desired
mix.
• This consider a 60/40 stock/bills
constant mix strategy (or $60 in stocks
and $40 in bills for a total investment of
$100).
Constant-Mix Strategies
• Constant-mix strategy will do
better than the buy- and-hold
because it buys more stocks as
they falls.
• The general rule of constant-mix
strategy is to buy stocks when
their prices are falling and to sell
stocks when they are rising.
Option-based Portfolio Insurance (OBPI)
• Strategies begin by specifying an
investment horizon and a desired
floor value at that horizon.
• It involve buying of Tbills and call
option. At maturity, the tbills
ensure the floor value and option
will have upside potential.
• Basically buying insurance for
your stock or hedging against a
possible decline.
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