What is your investment style?

Before you start investing, it is best to first gauge the investment style befitting you and your financial goals. That way, you can approach your investing in a more disciplined and organized manner.

Your investment style will typically be determined by the following factors:

  • Your temperament (i.e. your patience, the amount of effort you are willing to put in, the amount of risk you are willing to stomach)
  • Your profile (i.e. your age, income, wealth)
  • Your financial objectives

Discerning and articulating these very personal factors is a fantastic first step for any investor. What answers you reach from your discernment will guide you in finding the best investment style for you.

We broke down the most commonly practicable ones here for your consideration.

Active vs. Passive

An active investor picks his own stocks. A passive investor typically buys shares in an index fund such as BPI’s Philippine Stock Index Fund or the ATRAM Philippine Equity Smart Index Fund, effectively outsourcing the whole stock selection process. The active investor believes in his own ability to pick stocks to outperform the market. The passive investor believes that the most efficient way of producing long-term returns is by investing in the market as a whole.

The active investor bypasses the investment management fees charged by investment funds and stands the chance of finding great investment opportunities ignored by the market. The passive investor bypasses all the heavy research conducted by active investors which is not necessarily always fruitful.

Growth vs. Value

In terms of stocks, a value investor looks for companies selling at below their intrinsic value, preferably with a significant margin-of-safety. A growth investor looks for companies offering the possibility of above average growth, regardless of price in relation to intrinsic value.

Some famous value investors include Warren Buffett, Benjamin Graham, and to an extent Peter Lynch (although his style often also verges on the growth investing side). Some famous growth investors include Thomas Rowe Price, Jr. and Philip Fisher.

Investors could also consider investing in companies promising “growth at a reasonable price”. This approach blends elements of value investing and growth investing. In effect, the investor hopes to find stocks that may deliver above average growth but are not too expensive in relation to their intrinsic value.

How do I use a stock screen?

After Hours is an editorial column more loosely covering our opinions on a variety of topics in finance.

The ugly truth is that it is impossible to go through the financial statements of all available companies in the world’s stock exchanges. There is just not enough time. And although the potential for reward could be higher if you sift through each and every one, that would still mean sifting through a lot of dirt.

This is where stock screening comes in. It’s just easier and more straightforward. You pick a few criteria, making sure none are too restrictive, and then you exclude any stocks that do not meet this criteria. It is neither the most graceful practice nor the most thorough, but it quickly cuts down your universe of stocks to a smaller, more manageable group.

We have adapted some criteria borrowed from Chapter 14 (“Stock Selection for the Defensive Investor”) of Benjamin Graham’s The Intelligent Investor to serve as a starting point for any who wish to employ stock screening into their investment research process.

  1. Debt-to-Equity Ratio must be less than 1.0.
  2. Total Debt-to-Net Working Capital Ratio must be less than 1.0.
  3. Current Ratio must be more than 2.0.
  4. Company must have consistently paid out annual dividends over the last ten (10) years.
  5. Net Income must have grown by at least 33% compared to ten (10) years prior.
  6. Price-to-Earnings Ratio must be less than 15.0.
  7. Price-to-Book Ratio must be less than 1.5.