With hundreds — sometimes thousands — of options available in the stock market, the average investor faces the cumbersome challenge of choosing the most profitable or most lucrative stocks. For most investors, the “best” stocks are those that can provide consistent, sustainable and above-average returns. However, stock traders have now begun to realize that these stocks could be elusive and, in most cases, difficult to determine.
Winning in the stock market is not guaranteed. In fact, majority of those who will enter the stock market will experience actual capital losses along the way. Some, if not most, would lose their hard-earned money. Optimists would say they’ll just consider these losses as mere “tuition fees” associated with learning, while pessimists would use it as reason not to dabble in stock investing ever again.
How, then, would an investor mitigate his losses in stock investing?
There are a variety of trading strategies proposed by various schools of thought that could supposedly bring profits to an investor. There is Value Investing, a trading strategy that involves buying and owning of assets that appear under-priced compared to their expected value.
Another is Cost Averaging, or the investment of a fixed amount of money in regular periods in an attempt to smoothen out risks.
Speculative Trading, meanwhile, is a strategy of making profits through volatile short-term changes or fluctuations of stock prices.
There is also Momentum Investing, or betting on “hot” stocks that have surged in price in recent periods while selling “cold” stocks that have lost momentum and are in a price downtrend.
There are dozens more alternative investing strategies. In future article, we’ll give a more detailed discussion and analysis of each, but for now, we’ll just leave you with an insight that no single strategy has been proven to be the best among the rest.
One strategy may work for one trader and produce profits, but the same strategy could lead to losses when used by another investor. To each, his own — they say, and it would be best for an investor to discover the best strategy for himself after assessing his own investment objectives and risk profile first and testing various strategies altogether.
(See also: What’s your Investment Objective?)
6 Categories of Stocks
Another perspective in reducing risks in stock investing is to focus investments on groups or categories, and not just individual stocks, that correspond to one’s investment objective and risk profile. Since there are hundreds, sometimes thousands, of available stocks, it would be too tedious and costly to look at all options in the stock market. Unless a powerful machine or software that churns high-speed data analysis is used, one’s resources would be spread too thinly if dozens, even hundreds, of individual stocks are regularly monitored by the trader.
Thus, grouping stocks according to their characteristics can be of big help to investors. Popular value investor Peter Lynch proposed a grouping of stocks which could supposedly help simplify the investing process.
According to Peter Lynch, stocks may fall under any of these six (6) stock types or categories.
- 1. High-Growth Stocks. High-growth stocks are companies with double-digit earnings growth rates. These are mainly small and expanding companies.
- 2. Stalwarts. Stalwarts or medium-growth stocks are companies with high single-digit to low double-digit growth rates. They typically range from medium to big-sized companies.
- 3. Cyclicals. Cyclicals are companies whose earnings growth fluctuates in a predictable or unpredictable manner. With this volatility, timing is essential in buying or selling these stocks.
- 4. Turnaround. Turnarounds are stocks whose share prices have plunged due to force majeure, accidents or any other unfortunate events. Timing is essential in buying these stocks as their operations recover and normalize.
- 5. Asset Plays. Asset plays are stocks with valuable assets, including cash, properties, investments or trademarks. Their share prices are trading below the value of their assets.
- 6. Slow-Growth Stocks. Slow-growth stocks are large old companies whose earnings growth is lower than the country’s GDP growth. The payment of cash dividends is the main shareholders’ return of slow-growth stocks.
How to Profit from Investing in Stock Categories
For investors looking to achieve an investment return that outperforms inflation (including capital appreciation and total return), an aggressive investment portfolio is a good match. These investors should look for stocks in Asset Plays, Stalwarts and High-Growth categories. Cyclical stocks may be monitored for opportunities.
For investors whose objective is to achieve more stable returns with little or no capital growth, a defensive investment portfolio is more appropriate. These investors should select Slow-Growth stocks and big-sized Stalwarts.
In the Philippine Stock Exchange (PSE), certain locally traded stocks may belong to one or more of these stock categories. If you want to know which PSE stocks are considered High-Growth, Stalwarts, Cyclicals, Turnarounds, Asset Plays or Low-Growth, you can get this for free in PinoyInvestor.
This “Special Report on PSE Stock Groupings” was an exclusive report published in January 2014 and accessible only by Premium or Paid members. However, for a limited time, this Premium special report is now being made available to Free members. Sign up here for FREE if you want to get a copy of this report.
Knowing the various groupings of stocks and choosing appropriate categories, and not merely individual stocks, that fit the income objective and risk tolerance of an investor can indeed help simplify the investment process. Like other trading strategies, though, this may not work for everyone, but some investors may find value in using categorization that could help them win in the stock market.
Let us know which trading strategy works for you!