Forex Investment and Currency Trading

Your investment style as an investor is almost certain to reflect your character —perhaps more than you’d think. That’s just fine, because people have done well with many different styles. There are value-oriented investors, bargain hunters who look for stocks that are undervalued now. Then there are growth investors, glass-half-full types who look for stocks with bold prospects for the future.

Most people aren’t 100 percent one style or the other. In fact, it’s not always possible to draw hard-and-fast lines between growth and value. Many seasoned investors don’t bother to try; they simply characterize their style as a blend of value and growth.

But value, growth, and the various combinations thereof all have one thing in common: they rely on gathering and analyzing fundamental information about the company behind the stock.

Another group of investing styles goes a different route, eschewing fundamental research to focus instead on patterns in stock prices, market volume, and other data. These approaches, collectively known as technical analysis, often rely on mathematical and statistical models in an effort to predict the future.

Although some avowed practitioners of technical analysis have made a lot of money, their success is most likely based either on short-term luck or an integration of technical and fundamental analysis.

To be blunt, I don’t see how it’s possible to have an investment style without first having the facts about the companies in which you invest. How are sales and profits? Is there a dividend? Are new products in the pipeline? What’s the competition? And so on and so on.

Value Versus Growth
Although they’re often pitted against one another, like football teams or heavyweight boxers, value and growth are thought as different ways of looking at the same information—not opposite sides of a stock-picking slugfest.

Let’s suppose you were considering buying shares in the Tribune Company. At the end of June 2005, the company’s stock had lost more than a quarter of its value over the past 2 years, while the S&P 500 stocks overall gained more than 20 percent. One big reason was tailing circulation at its flagship newspapers, the Los Angeles Times, Newsday, and the Chicago Tribune. But even with declining readership, the company’s newspapers were dominant in large markets, and continued to produce large amounts of cash. So the Tribune Company could be seen as a value investment, a company with underrated assets.

On the other hand, it also had elements of a growth business. For one thing, the company co-owned the WB television network with Time Warner, giving it a gracing, non-newspaper business. And if it could become more adept at using the Internet, there might be hidden growth possible in the company’s core business of content generation.

Sometimes you’ll find a stock only a growth investor could love, such as a biotech firm with a promising new drug in development but no sales for years to come. Or one that’s a value seeker’s special—perhaps a venerable manufacturing firm that’s been steadily losing sales to overseas compa¬nies, but still has business assets worth more than the stock price. More often, though, stocks (and investors) mix elements of both.

Red Flags
Value investors risk getting stuck with stocks that are cheap now, and destined to stay that way. Evaluating the quality of management and business operations is a key factor in avoiding these “value traps.” Sure, the perennial number three maker of industrial fans may look underpriced on paper compared to numbers one and two. But is that because it’s been overshadowed, or because it has inferior products or service? If it’s the latter, earnings may never improve, as the only way the company can get business is by cutting prices. In that case, what appears to be an undervalued stock could really be no bargain.
 
Value
Value investors look at the present. They’re looking for companies that are worth more right now than the market thinks they are. Often, value investors look for stocks with low prices relative to how much a company makes, or for high dividends or valuable business assets. Consider the following:

• Low prices. Go through price/ earnings ratios, cash flow, and other ways of measuring a stock’s price against the company’s value. Crunching the numbers is at the heart of the value style. When you find a company that produces higher- than-average earnings per share, there’s a good chance you’ve found a stock with room to rise.
• High dividends. You also want to look at the company’s dividend. Suppose it pays out 25 cents per quarter, or $1 a year. With the stock priced at $30, you’d be getting a 3.25 percent annual return on your investment just from the dividend alone. That’s more than you’re probably earning on your savings or money-market account.
• Valuable assets. Finally, you need to know what else a company has going for (and against) it: how much debt, future business plans, the outlook for its industry, and so on. One basic measure is book value, a totaling up of all of a company’s assets (cash, real estate, equipment, goodwill) minus all of its liabilities (loans, accounts payable, pension obligations, and the like).

Ultimately, you need to decide whether the stock is underpriced. For that, you want to use not one valuation measure, but all of these. As a value investor, you’re looking for places the so-called efficient markets haven’t reached by sorting out financial and business information for yourself.

Sometimes that means seeking out companies or types of businesses other investors aren’t interested in, or trying to see through short-term bad news to find long-term strength. For example, cyclical industries subject to the ups and downs of the economy, such as automakers, airlines, or mining companies, can have long down periods. But beaten-down stocks that can’t get a date to the prom have one big advantage: they tend to have low betas, meaning that they are less volatile than the market as a whole.

Market Term
Beta is a way of describing how movements in a stock’s price compare with those of the broader market. A beta of 1 means the stock tends to move up and down about as much as the market. A beta below 1 means it tends to move less, while a beta above 1 means it tends to move more. As you might expect, growth stocks often have betas above 1, meaning they’re riskier than the market average. Value stocks, on the other hand, typically have betas lower than 1.

Growth
Growth investors look at the future. That is, they start with broader social, economic, political, and business trends and try to identify companies that will benefit from them.

They’re still using fundamentals, they look at the same financial information as value investors. But they’re willing to pay more now—sometimes a lot more—to get in on growth later. Consider the following:

• Business insight. Because growth investors are looking for potential, they’re generally more interested in a company’s business information than in its financial data. Obviously, no investor can afford to ignore unclear accounting, unsustainable losses, or other signs of a financial debacle in the making. But if you’re looking for the next Microsoft, it’s also essential to know as much as you can about software.
• Knowing where to look. Speaking of software, it’s no coincidence that so many growth companies are clustered in technology, health care, and media. Growth investors tend to focus on companies with new products or the ability to tap new markets, which often means they look hardest at industries where innovation is in full swing.
• Finding future value. This is what makes growth investing hard—you’re always looking at new products and services, so there aren’t any past financial results. Statistics tend not to be much use in find¬ing growth stocks. By the time they show rapid growth, it’s often nearing an end.

Almost no company can keep growing faster than those around it for more than a few years. Even the greatest growth businesses, from McDonald’s to Intel, slow down eventually.

Unlike value investing, which relies more heavily on a company’s financial information and existing business situation, growth investing requires you to judge a company’s business prospects down the line, and be ready to move quickly as those projections change. And the betas of these stocks tend to be high, meaning that they’re more volatile than most. That makes it the harder of the two styles, although the thrill of finding exciting new companies also makes it the more popular one.

The Bottom Line
Virtually every great growth stock becomes a value stock eventually. For example, let’s look at McDonald’s. For the 20 years from 1981 through 2000, the stock’s value went from a split-adjusted share price of less than $2 all the way up to $34. Earnings grew explosively, due in large part to openings of new stores in Europe, South America, and Asia.

Eventually, the company ran out of places to expand. Management was slow to adjust, and a few years of continued emphasis on growth led to a first-ever money-losing year in 2003. When McDonald’s share price dipped—going as low as $ 12 in March of that year—value investors got interested- At that price, the company’s dividend was 1.9 percent, much better than the interest banks were offering at the time. With strong cash flow from more than half a million restaurants in the United States alone, McDonald’s management had the time and resources to address the company’s problems. A focus on improving existing restaurants, adjusting pricing, changing menus, and other busi¬ness changes brought the business back to profitability, and management made clear its optimism by raising the dividend by 70 percent later in the year. And as of June 30, 2005, the stock price had risen again to more than $30 a share.