Investment styles I (Time)

http://finance.kampungtalk.net/2008/01/investment-styles-i-time

So what kind of investor are you? Are you a typical 25 year old with not much spare cash, some debts, willing to take lots of risk, and will put in money every month? Or are you a 50 year old, semi retired, got $500k in the bank, and looking for stable but not necessarily high returns.

Those are some of the questions you've gotta ask yourself before you start to invest. Questions pertaining to: Time horizon, Risk portfolio, Active/Passive investing, types of research, amount of capital, etc..

While I won't go into all those topics on personal finance (for now), lets just look at how all these factors do affect your investment styles.

Time
Time is a very important element of investments. It is time that actually gives us the exponential growth of the compounding effect. As you would have already read about the compounding effect in the first article, you can see how making profitable investments as early in life can result in a large fortune 30-40 years down the road.

When most people talk about time in investments, they usually look at the time horizon. This basically means, how long are you able to hold the investments for. This doesn't mean how long are you going to hold the investment for. It just means, given that all the conditions for that particular investment is correction, will you continue holding it for 1 year, 5 years, 10 years? An investor with a long time horizon might decide to get out of the investment after 1 month, because he decided that the conditions present when he first made the investments is now gone. An example could be investing in the middle east could have been a good investment for the long term, but suddenly when there is a war, then it would probably be prudent to get out of there.

Just looking at this, it can generally be said that younger people would have a longer time horizon than older folks. A person can't just base his time horizon on that though. Perhaps, you are 25 years of age, and you are looking to get married in 5 years time, have 2 kids, and planning to buy a condominium. Then in fact, for a large part of your capital, your time horizon is only about 5 years at most.

On another aspect, time is also a factor in deciding your investing style. That is, your trade time span. Here would be where you determine if you are a day trader (who is someone who buys and sells within the day), or a buy-and-hold investor (someone who buys and hold till he dies). Of course, you can be anywhere in between, from the scalpers to the swing traders, to the sector players, to the cycle traders. Lets look at some of them.

A day trader is basically a person who does not hold any position overnight. The idea of this is that you are not able to quantify the external risk caused by the overnight movements. So the day trader might buy a stock in the morning, and sell it buy lunchtime, or maybe before market closing.

A scalper, is a specialised typed of day trader. The idea behind that of a scalper is to catch small movements that happen regularly in the day, by taking huge positions. For example, a scalper might buy a stock at 50cents, and sell it at 50.5cents. Though, he would probably buy a huge amount to justify his time and effort in that trade.

A swing trader, is a person who believes prices have some form of momentum behind it. Thus, he might buy a stock, and hold it for a couple of days, to a week or 2 at most. He would exit the position when he feels that the momentum behind it has waned or reversed.

A cycle trader/sector player, believes that the market moves in cycles or waves. As such, he would try to position himself at the beginning of a cycle/sector and ride it all the way to the top. Most of the time, the holding period could be days, weeks, or sometimes months.

A value investor, could be a person that seeks for companies that seem to have its value mispriced to the market. As such, he tries to position himself into such stocks, and would sell of when the stock becomes fairly priced. These kind of plays, are usually weeks to months usually.

A buy-and-hold investor, someone like Warren Buffet, is someone who believes that only companies with future growth potential should be bought, and that companies currently in vogue should not be bought just because its the new hot stories. To someone like him, its basically companies that will survive the economy for many years to come. Such investors, generally buy good companies, and plan to hold it forever, while collecting any dividend payouts and capital growth.

While the descriptions above seem to be fairly rigid, traders and investors actually fall into many categories at the same time.





Above information extracted from
http://finance.kampungtalk.net/2008/01/investment-styles-i-time

Learn more about investment style II on Risk
http://finance.kampungtalk.net/2008/01/investment-styles-ii-risk