Investing

There are only two types of participants in the securities world - traders and investors. It is my opinion that qualitative participants are generally investors and quantitative participants are traders. Qualitative investors generally enter trades using reasoning and rationale regarding the securities they will acquire while quantitative traders generally enter trades by programming formulas using trading languages that are triggered to buy or sell securities based on hitting predetermined targets typically based on technical patterns.

The three most predominant investment styles in the market historically are value, growth and quality investing. 

Value

Value investing fathered by Benjamin Graham and David Dodd focuses on the intrinsic value of a company imploring only purchasing these stocks when market price provides a significant margin of safety. These stocks which at many points during Grahams and Dodds careers often sold below even book value have become more difficult to find with modern analytical tools and the entry of thousands of fund managers and analysts.

Growth 

Growth investing fathered by T Rowe Price and Phillip Fisher focuses on investing in fewer companies that will continue to grow in sales and earnings per share for many months, years and in a few cases even decades. These stocks are not bought with reckless abandon and instead are acquired only during significant pull backs which they often exhibited in their march to thousands of points of return. 

Quality

Quality investing is a style of investing which focuses on selecting companies with the greatest returns on investment, assets and equity while maintaining consistent cash flows and requiring little to no leverage or debt. In my opinion as a thirty year student of his investment decisions I would say that this is most definitely Warren Buffetts primary criterion in selecting stocks or companies to buy much more than value or growth investing which he is often associated with.

Empirical studies have shown that being invested in the market for longer durations has nearly always produced positive returns. For example for every rolling twenty year period since 1950 the S&P has been positive. As time in the market increases however, it is more likely that portfolio returns will simply mirror the market indexes also referred to as market risk or beta. Simply purchasing an index fund using dollar cost averaging outperforms 80% of actively managed funds because of fees and investor performance chasing. To produce returns better than the indexes in the long run requires investing counter to the prevailing consensus based on participants psychology and waiting for the market to correct. This is a very successful approach which very few investors and traders have the temperament to endure. 

Buy and hold investing whether value, growth or quality produces excellent results in the long run as we have discussed above. Practitioners of ‘buy and hold’ are successful because they have learned to control their emotions and employ the right even temperament to sustain the large drawdowns to their accounts. For most traders these ‘buy and hold‘ strategies are completely ruinous. The reason is that market positioning and dynamics are in constant flux and since the vast majority of all trades are algorithmic these computers simply react many times faster than any human could or more importantly would. Once a trader is under water on a trade, cognitive biases take over their decision making and the account is history.

Momentum investing is a strategy that involves buying assets that have shown an upward trend and selling those that have shown a downward trend. It relies on the belief that assets that have performed well in the recent past will continue to perform well in the future, while those that have performed poorly will continue to decline. Investors using momentum investing typically identify assets with strong price momentum and hold them until the momentum wanes. The approach seeks to capitalize on market trends and momentum indicators, aiming to profit from short-term price movements. 

Richard Driehaus is considered the modern father of momentum investing having used it to operate his successful fund management business for nearly 40 years. He often said that he would rather buy a stock having made a new high and selling that stock higher than trying to catch a falling knife and buying it at a low. Earlier practitioners like David Ricardo in the early 1800s and Charles Dow, Jesse Livermore and Richard Wyckoff in the early 20th century also developed systems involving momentum or trend following. Finally Richard Donchian, Nicholas Darvas and Jack Dreyfus became household names in the 1950s to hundreds of thousands of technical traders over the next seventy years as they developed actual charting systems to execute on momentum trading and investing strategies.

Here are some great blog posts expanding further on this popular philosophy.