Did you know there are 6 types of stocks? I bet you didn’t! I didn’t as well, and I was making all the wrong investment decisions! My investment goals did not match my investment decisions simply because I didn’t understand that stocks were separated by their characteristics. It’s amazing how my investing changed once I knew how to identify the different types of stocks and understand their characteristics to suit my investment profile!
It’s not uncommon to hear about people who claim to have a low risk profile yet take on stocks that are risky in nature, and vice-versa. I believe what’s important here is to match your risk profile with your portfolio rather than rely on “Diversification”.
Is it wrong? No.
Can it be better? Yes.
1. Slow Growers
Slow growers are companies that tend to be large and aging companies. Because of their sheer size, growth isn’t the word you’re looking at. It’s stability. (But as we know, there’s not such thing as too big to fail these days.. Just look at the recent Sete Brasil) Due to its large capital base, it takes an incredible amount of work to see it return to its former days of double digit growth! Also, as they get too big, they can also become very bureaucratic, leaving very little room for innovation and growth. The top management just want to play it safe and make sure the company doesn’t fail in their hands so they wouldn’t let their predecessors down and to pass the company on in a better state (hopefully).
Depending on your investment goals, you may or may not want to own such stocks. If you’re seeking strong capital growth, you wouldn’t find it here. If what you are looking for is a stable stream of dividends, perhaps you can consider looking into Slow Growers.
Question: Are you looking for growth but holding onto Slow Growers?
Stalwarts are Warren Buffett’s favourite type of stocks. These are businesses synonymous to a fortress, with a strong economic moat. Value investors will be familiar with such stocks and these are the nicest stocks to hold for the long term because they not only reward their investors with a reasonable amount of capital growth, they pay off generous and regular dividends as well. These are the stocks we want to hold on to!
Take note that while these are great companies, it doesn’t translate to be a great investment if not bought at the right price. So make sure you do not overpay for such stocks!
3. Fast Growers
Fast Growers are great companies to invest in if you’re looking to expand your capital base in a relatively short amount of time! Fast growers as its name suggests, grows fast, but not without its shortcomings. The key here is to buy before growth accelerates and to sell when growth is slowing down. Even if it doesn’t slow down, it may turn into a Stalwart in the future as it begins to find stability in its business operations. Understanding the business is crucial because you need to be able to spot catalysts for growth!
As the name plainly suggests, Cyclicals are stocks with earnings that move in tandem to a certain cycle with a somewhat predictable fashion. Timing is absolutely critical when investing in cyclicals. Being able to pick the bottom could mean enormous returns. We’re looking possibly at multibaggers. The key is to buy near the bottom and sell near the top. To execute such feat of achievement will require timing of the market. If you’re not comfortable with timing the markets, maybe you might want to re-consider holding onto such stocks. Think oil.
Turnarounds are distressed companies on the verge of bankruptcy but are trying to turn profitable. These companies can be hard to filter out unless you read into the news. In terms of returns, these companies will give you the craziest sort of returns. Investing in such companies require guts and a deep level of understanding of the company due to the high risk of insolvency. The rewards however, can be very tempting, and I’ll prove it to you with an example in our home market. Osim share price tanked till $0.05 as their investment overseas failed big time that they almost went broke. However luck would have it, Osim survived and its share price soared steadily over the next 5 years to $2.90, representing a 5700% increase!
While OSIM is one of the rare few that actually survived, there are many other companies that have broken under the pressure. Do not be too quick to assume that the same will happen for all stocks that face potential bankruptcy. Again, think Sete Brasil!
Question: Are you a conservative investor but holding onto turnaround stocks?
6. Asset Plays
These are companies that have assets that are valuable and have not been reflected in the share price. The keyword here is ‘Hidden Value’. Commonly you’ll find that REITs fall into such a category because of land prices that are revalued once a year. Other ways to identify asset plays are companies with high cash value. In some rare occasions, you may find that a company has more cash-per-share than its actual share price! Patience is required as it takes time for the market to fully reflect the assets in the share price.
We are very excited to announce that our flagship Value-Growth Investing (VGI) Course has been finalised and we will be commencing in June 2016! Do express interest with us early so we can cater to the demand! Contact us directly for any enquiries regarding VGI and we would be glad to answer all of your questions! Get ready to accelerate your investment knowledge and be part of a community that is committed to your learning! Are you ready to take charge of your learning?