Two fundamental strategies govern the process of investing. The first, active trading, describes a tendency to frequently buy and sell assets, seeking to make a profit on each trade. This strategy assumes the trader has information or instincts, or both, that allow him to “beat the market.” Depending on the particular market, the trades will take place many times a day or every few weeks. Today, computer programs allow traders in stocks to make thousands of trades daily. Some traders in commodities like precious metals will also make many trades a day.
The other strategy focuses on a longer-term perspective. A purchased asset is held for a long period, ignoring the ups and downs of the marketplace. In this strategy, investors base the original purchase more on the intrinsic value of the investment and long-term trends. Day-to-day factors are of little interest to a long-term, value investor.
The Long-Term Success of Equities
One of the strongest proponents of value investing, though he never used that term, was Ben Graham. He and a fellow teacher, David Dodd published a book in 934 entitled “Security Analysis.” In very general terms, the theme of the book was discussion of a strategy of investing in the stocks of companies with solid value but currently under-priced in the market.
They supported their point by pointing out that successful companies had built-in methods of compensating for losses in the value of the dollar. By focusing on growth of earnings, regardless of the economy and other issues, these companies create greater value for their shareholders over the long-term. This is the buy and hold strategy. It is a fundamental aspect of finance and investing today. This strategy has been proven valid by the total average returns of stocks over the past 90 years.
One of the students of Graham and his strategy, Warren Buffett, has proven himself one of the most successful investors of our time. He refined the basic concept to include a priority on finding quality companies with strong intrinsic value, and trading in the market at a discount to that value. This so-called margin of safety is a key position sought by value investors.
The Best Strategy Today
Which choice is best for any investment portfolio is heavily debated among scholars and industry participants. One aspect of this debate argues for a diversified approach that uses multiple classes of assets. Such a strategy also utilizes both long term and trading techniques for different assets.
The significant concerns over world stability have more investors adding precious metals like gold and silver to their portfolios. Gold and similar rare metals are favorites because of their reputation for strong intrinsic value. Gold is one asset that for most of its history was primarily bought to be held. Today, there are numerous markets for active trading of the commodity as stocks, bars, coins, and in other forms.
All efforts to invest seek to obtain an acceptable return. Choosing the right strategy will ultimately determine the success of those efforts.