Stock investing - have you found your investing style?

So how exactly can you formulate your investing philosophy and style?
Before we get an answer to this question, let me give a very different example of decision making, that of . When it comes to buying apparels, different people tend to have different preferences. Some may prefer buying high-quality apparels of top notch brands without worrying much about the price. Some may prefer premium or reasonably good brands but at a discounted price. Yet others may focus primarily on discounts with low importance to quality or brand. There are also people who prefer buying the latest fashion, irrespective of the quality, brand or price. Some people may also prefer using a combination of the above while making the purchase. Now, these are different types of people having different preferences for shopping, based on what’s important for them. Like the motivational guru Stephen R. Covey says, "Strength lies in differences, not in similarities." So there’s no right or wrong here and everyone chooses a shopping style based on their preferences and comfort.

Now, similar to apparel shopping, there are different investing styles (also referred to as factors) that may suit different types of . Here are some of the prominent or factors.

Quality: In case of stocks, quality typically refers to the quality of the underlying business in terms of profitability, financial leverage, earnings quality, cash flows and so on. One can use different to assess these evaluation parameters. For example, profitability can be assessed using Return on Equity (ROE), Return on Capital Employed (ROCE), etc. Financial leverage can be assessed using debt-to to-equity ratio and so on.

Value: This is a style of investing where investors assess the price of the stock vs its intrinsic value. Stocks that are trading at a significant discount to their intrinsic value are preferred by investors who follow a value style of investing. Valuation parameters/methods such as Discounted Cash Flow, Price to earnings, Price to Book, Price to free cash flow, Enterprise value to EBITDA, etc are used to assess the valuation of the stock.

Momentum: Momentum style of investing largely relies on the price strength of stocks. Investors following such style look to buy stocks experiencing upward price momentum and selling stocks that are experiencing a weakening price trend.

: In this style of investing, the preference is for stocks that are less volatile compared to the broader market.

Sentiment: Unlike the above given styles or factors that are based on past financials data or price data, the Sentiment Factor measures change in analyst expectations of a company's future performance based on revisions made to financial outlook or price targets. While individual price estimates might not have much predictive power, when such estimates are aggregated across all the analysts, it provides useful information to design a systematic alpha factor around it. While most of the other factors discussed above are slow moving, a sentiment factor is a fast-moving factor with smaller shelf life.

As an investor, one can also choose a combination of the above styles to formulate an investment strategy, based on one’s preference and comfort.

How to identify which is right for you?
As a stock investor, you need to first understand the above investing styles and decide which of these styles you are comfortable with. This would typically depend on multiple factors such as your risk appetite, i.e. ability to withstand downside, expected holding period, your inherent preferences and so on. More importantly, with experience, you will gain better insights into how these investing styles perform across market cycles and your investing style can evolve over time based on this experience and insights.

How can you identify stocks that meet your investment style?
Once you decide on your investing style, you need to assess stocks using appropriate metrics. This may involve a detailed analysis of the financials of a company including profitability trends, earnings analysis, financial leverage, valuation, price movement, and so on. For example: has an interesting feature called Factor Analysis on the stock pages, which helps users to shortlist stocks. This feature can help you understand the rating (on a scale of 1 to 5) of almost 5,000 listed stocks on different factors, i.e. Quality, Value, Momentum, Low Volatility, etc.

ETMarkets.com

Such user-friendly tools can help you spot the right investment opportunities and whether they meet your investing style. Needless to say, once you have a stock that meets your investing style, you need to conduct deeper research before making the final investment decision.

(The author Nilesh D Naik is Head of Investment Products, Share.Market. Views are own)