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Income, Value and Growth Investing

Part 2 of 5 in the White Top View series: The Investing Choices.

Last time we discussed the Big 5 money making investment choices.

This time we discuss the Three most conservative choices:

  1. The best and easiest place to start – Income Investing

  2. A solid alternative – Value Investing

  3. More aggressive and demanding – Growth Investing  

New investors should begin by building an income producing portfolio. Selecting conservative, secure and well established companies produces solid results.

Learn the straightforward methods of building such a portfolio. It can be done with little risk. We will work through how to do it one small easy step at a time.

Before covering that there is one more thing to talk about. I need to note that for the time being we are setting aside discussion of risk. Discussing, considering and managing risk are essential parts of successful investing. Risk will be well covered in future discussions.

Depending on the strategy and circumstances risk can be significant. However, risk can also be prudently managed.

The specifics of each approach will come later. We begin with a broader overview of each strategy.

1. The best and easiest place to start – Income investing
Income investing is the easy and most straightforward way to learn about investing and markets. It seeks investments for the long term. Those are the stocks to buy and ride for a very long time. To most income investors a long time means multiple years. The very best part of owning such stocks, you are paid to take the ride!

Investing to produce income is also the least risky and most secure strategy to learn. An income producing portfolio typically consists of two types of investments. Interest paying bonds and dividend paying stocks are most often combined for this approach.

Investing in bonds requires participating in the so called fixed income market. In theory they reliably produce a set and secure payment.

Bonds have the advantage of little drama when held to maturity. They provide a set return and at maturity, return your capital. However small investors can be challenged to buy and sell them at favorable prices. The bond market has multiple gatekeepers and toll takers with their hands out.

Income seeking investors can actually do better buying equities. Equities offer upside price potential as well as superior income streams. Many large, high quality and well established companies reliably make secure dividend payments.

Future discussions will cover exactly what to look for and how to find these solid secure and long term stock plays that produce reliable income.

This approach demands the least amount of account monitoring. It does demand that you pay some attention but day to day study is not needed.

Returns reflect this security. They can be good and when played well can indeed outperform the market. However, income investing does not offer the highest returns. Rather this is the stable base of an investor portfolio.

2. A solid alternative – Value Investing
Value investing is the ultimate buy and hold strategy. This conservative long term method of investing does have a record of beating the market. It is the best widely known conservative approach to the market.

Benjamin Graham is the respected and very successful father of this specific stock picking and growth producing strategy.

Warren Buffett, Graham’s star pupil, is the current poster boy for value investing. Buffett adds his excellent and on going results to the outstanding record of value investing.

If you like buying on sale this may be the approach for you! Essentially, value investors seek intrinsic value greater than the price of the stock. They want to buy cheap.

Used properly and successfully, value investing produces extraordinary returns over decades of use. You need the right temperament and a willingness to work at investing because it takes effort.

You most definitely can learn value investing. However, this is not a simple strategy to do well.

I do not recommend it for beginners but certainly do for those willing to work and seriously study the market, companies and the economy. Patient number crunchers love this approach to investing. Those with the right temperament can do very well with it.

Anyone interested should begin by first reading the value investing classic:  The Intelligent Investor, by Benjamin Graham. Amazon offers this value investing bible here.

3. More aggressive and demanding – Growth Investing
Growth investing is the first strategy that involves trading. That contrasts with the proceeding strategies. Growth investing seeks to pick stocks that will significantly increase in value in the short to medium term.

The intention is to buy and ride the stock to a higher price and then sell. Less attention is paid to selecting stocks offering dividend or income payments. The idea being to ride the equity price higher.

Growth investing seeks higher returns in a shorter time than the previous approaches. It can work very well in positive market environments. That means it produces excellent and superior results in rising or bull markets.

It requires buying and selling multiple stocks in periods of good economic growth. This basic strategy does not work at all in a negative, falling or so called bear market.

Growth investing requires more market knowledge. It also requires the ability to recognize basic broad market changes. That can be a significant challenge, especially for a beginner. Obviously it demands considerably more and regular attention than the previous strategies.

An investor using a growth approach needs both knowledge and comfort with the markets. That means it should not ever be used by a beginner without close help, coaching or oversight.

Growth investing can produce outstanding results when played well. It can also produce significant losses when poorly or inappropriately used.

Playing the growth strategy well can definitely be learned by anyone willing to put in the effort. However, this is not a strategy for beginners. At a minimum it requires a moderate level of experience and knowledge to be successfully and consistently used.

Our next discussion can cover the last two basic strategies, Trading and Speculating. These more aggressive strategies carry considerably more risk as well as greater potential rewards. They are both advanced strategies for very experienced investors.

Which strategy has the most appeal to you? Make a comment, ask a question, we can talk about it.

These discussions are intended to help you better understand markets and investing. The White Top Views email list will not be shared or sold.

Have a great day!


White Top Investor
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