chapter 15 Equity investing stratgeies

value investing

• identify companies trading at a discount to their intrinsic value

• investors typically look for low Price-to-Earnings (P/E) ratios and low Price-to-Book (P/B) ratios.

• value premium represents the long-term tendency of value stocks (low price-to-book/earnings) to generate higher returns than growth stocks.

“value trap” : (cheap stocks that only get cheaper)

Growth investing

• focuses on the appreciation of capital

• Identify companies whose earnings are expected to grow at an above-average rate compared to their industry

• rarely pay dividends

• high Price-to-Earnings (P/E) and high Price-to-Book (P/B) ratios because investors are willing to pay a premium for future earnings.

• involve higher volaltility

GROWTH AT A REASONABLE PRICE (GARP)

• a strategy that balances the characteristics of both Value and Growth investing.

• Helps to avoid cheap stocks with no future and overvalued stocks

• investors look for earnings above the market average

• Price/Earnings-to-Growth (PEG)

Price/Earnings-to-Growth (PEG)

• is used to determine a stock's value while also factoring in the company's expected earnings growth.

Income investing

• securities that generate a steady, predictable income; capital gains

• focues on dividend paying equities and interest paying fixed income

• Provides immediate liquidty (primarily by generating regular, automatic cash flows that do not require selling the underlying investment.)

Dividends

• is the proportionate distribution of a firm’s earnings to its shareholders.

• Dividend-paying equity securities

  Stable: high dividend payout ratio

  Growing: high retention ratio

Holding period return ( HPR)

• is the total return on an investment over the entire time it is held

index investing

• aka passive equity investing

• A strategy that seeks to produce returns that closely follow a specific benchmark, such as the S&P 500 or NASDAQ 100.

• mostly implemented through ETF

• less risky

• better tax advantages

Fundamental Analysis:

• focuses on a company's financial statements to understand profitability, growth, and risk.

• It maps business activities into forecasts to estimate "intrinsic value."

Technical Analysis

• Evaluates securities by analyzing statistics generated by market activity, such as past prices and volume.

• typesof charts : candlesticks, head and shoulders, bollinger bands

• three core premises:

  • the markets reflect all relevant information

  • price move in trends

  • history repeats itself

Quantative trading

• n investment strategy that uses mathematical modeling and data analysis to identify trading opportunities.

• aims to remove human emotion and behavioral biases

• Algo trading: lgo-Trading)

  Mechanism: Uses a pre-defined set of rules (algorithms) to automatically generate buy and sell decisions.

High frequency trading ( HFT)

• uses powerful computers to place a large number of orders in fractions of a second.

• HFTs buy stock to induce other traders to do the same, then sell quickly for a profit as demand increases the price.

Option strategies

• covered call:

• protective put

• bull cal spread

• calendar spread

• diagnoal spreaad

ESG investing

• A strategy that considers non-financial factors—specifically environmental, social, and governance issues

• aka Sustainable Investing, Socially Responsible Investing (SRI), and Mission-Related Investing.

• To achieve a "societal return" (impact on society) in addition to a monetary return.

• High ESG ratings can lower a company’s systematic risk, which potentially leads to a lower cost of capital and a higher valuation.

• Higher ESG scores tend to be correlated with lower idiosyncratic risk, which translates into higher profitability and reduced exposure to tail risk.