Wednesday, May 28, 2008

Investment Strategies

I deal firstly with equities.

I will discuss the following strategies:

1. Buy and Hold;
2. Trend Following;
3. Chart patterns;
4. Swing Trading.

The details of these strategies have been discussed in great length elsewhere. I will merely summarise them according to their main principles.

Buy and hold generally requires investors to identify companies with good businesses and to purchase shares as if they are purchasing a part ownership of the underlying business of the company. The main assumption is that the price of the shares in such companies will mirror the earnings of the underlying business of the company within a timeframe acceptable to the investor, which is usually long term, normally defined as five years or more. A precursor variant of this approach requires an investor to buy shares at a price less than the value of the net tangible assets value per share of the company in question, and to hold the share until the share price equals the net tangible assets value per share.

Trend following requires investors to set up positions in a particular security with the objective of making profits from a sustained unidirectional movement in price, known as trends. The main assumption of this approach is that the price patterns of a security in question will exhibit trends, and profits made in following such trends will offset the losses in securities which do not trend, within a timeframe acceptable to the investor.

Chart patterns requires investors to identify price patterns which provides a high probability of the price of a security behaving in a predictable manner, and to attempt to profit from taking positions accordingly. The less advance adherents to this method rely on instinct and gut feel, the more advanced adherents such as Thomas Bulkowski relies on detailed statistical analysis.

Swing trading requires investors to identify points of inflection in the price of a security, for example so called resistance and support lines. This apparently allows an investor to profit by buying and selling at the inflection points.

The strategies above makes very different, and often conflicting assumptions about the price behaviour of a security in question. Debates have raged over decades about which approach provides the highest returns.

My ultimate aim is to investigate whether it is possible to unify these approaches.


My first blog.

The aim of this blog is to put my thoughts in order in respect of issues concerning financial investments.