Stocks are scary and confusing and it is hard to just “jump in”. Experts and literature use all sorts of statistics and finance lingo, that for me felt like a huge wall to climb before I thought I could start investing in stocks. After months of reading (I am still very much an amateur) I have started compiling the basics of what I have learned about the market and put it here.
Kind of like a journal for my own personal use and learning. But it is public, so on the off chance that it can provide value to another newbie like me hoping to start investing and learn about the world and stocks.
Investors delegate stocks into a few broad categories, aka Factors in the finance world.
Below I will go into a broad description of each category of investments, the general trend of the investment, and some
example tickers to look for. These definitions are very basic, and broad, but as you learn more about each category, and
their subcategories, you will start to be able to place each of your investments into their respective categories.
Growth
What is it:
Growth companies are companies with HIGH valuations (are worth a ton of money). Most major tech companies that you know of fall into this category.
Growth stocks are expensive in nature. Growth stocks are unsurprisingly expected to grow (and should grow faster and larger than similar companies or their peers).
So to classify a growth stock, you look for a strong growth rate (both historically and projected). This could be between 4-7% for larger companies and 10+% for smaller companies
(larger companies don’t typically grow as fast as smaller companies…. Sorry Apple).
Other characteristics of Growth Stocks:
- Strong Return on Equity (aka... you make alot of money from your investment over time)
- Consistent and strong Earnings per share (aka... The company is able to use your investment to make a large profit)
Growth stocks are almost always reinvesting into themselves, so don’t expect a dividend from these companies. (A dividend is when a company pays investors back some of the profit they earned. Dividends are completely optional and dependent on the company.)
Recent Performance:
Growth stocks have performed really well the past decade. They have benefitted from low long-term interest rates (Thanks FED). Low interest rates helped lift growth stocks, because the discount rate needed to borrow money was low, making money in their possession more valuable. We saw a crash of Growth stocks during the last months of 2018. With the FED hinting at increasing the interest rates. It is questionable whether or not Growth stocks will outperform every other stock strategy.
Example Stocks:
Amazon, Google, Wayfair, Lululemon, Netflix, Constellation Brands, iRobot
Value
What is it:
Cheap stocks that the market has underpriced. These stocks have the potential to grow into a healthy business, and the market will soon realize the correct price for this stock. When investing in value stocks, you are hoping that the market will also see the true value of this company and will correct the price. A good list of potential value stocks are stocks that have recently hit 52-week lows.
Basic Characteristics:
- PE ration is in bottom 10% of companies (aka... there isn't as much growth per dollar invested, comparatively)
- Price to earnings growth ratio < 1
- As much equity as debt
- The current assets are twice the liabilities
Recent Performance:
The past decade, value stocks have really underperformed. Like REALLY underperformed.
Example Stocks:
TWTR, Z, SAFM,
JoCee’s Favorite:
SQ and HQY are my two favorite value stocks. I see huge potential in both companies, and think they are both healthy enough companies and big enough companies to become realy powerhouses.
Momentum
What is it:
The basic idea, is that if a stock has out-performed well recently, it will continue to outperform for the short-term future. Kind of the idea that a body in motion will stay in motion. This factor is where quant investing sort of begins. In order to determine a momentum investment, you look for technical indicators which designate out-performance, and under-performance. These indicators would tell you when to buy and sell.
An example would be to use the 50-day and 200-day moving averages, if the 50-day average outperforms the 200-day moving average, that may be your signal to buy. When the 50-day average drops below the 200-day average, that is the indicator to sell.
Recent Performance: Overall, momentum investors that began investing right after the last recession, would have performed very well the past ten years.
Example Stocks:
Tribune Media Company, AutoZone
Quality/Core
What is it:
Quality companies are those with healthy balance sheets. These companies are typically large, old, and not going away any time soon. Because of this, you will expect less return on investment since putting money into these companies isn’t very risky. You should also expect some dividends to end up in your pocket. You should have a few Quality/Core stocks in your portfolio, and just hold these for a long time.
A good rule of thumb for a core investment is if it is recession proof. For example, Waste Management is recession proof because even during a recession, everyone will still be taking out their garbage. A counter example is Bloomin Brands (The company that owns Outback Stackhouse, Carrabba’s Italian Grill, and other chain restaurants). During a recession, people will sacrifice going out to eat, and as a result, this non-recession proof stock would suffer.
I also consider commodities in the Quality/Core bucket. Commodities are gold, farm animals, wheat, iron, and anything that you ‘buy’. Next time there is a scare in the market, watch as the price of Gold jumps. When uncertainty hits nervous investors pull out of non-core investments, and throw their money into Gold and other commodities.
For the new-comer, it isn’t a bad idea to have the majority of your portfolio in Quality/Core investments. This is also where you will place the majority of your investments as you approach retiring.
Recent Performance:
Continual and reliable slow and steady growth.
Example Stocks:
Visa, Home Depot, Waste Management
There are tons of information that dives deeper, and probably more accurately into the definitions, trends, and risks of each strategy. As you continue reading, you will start to see how all these stocks coexist in the same universe. For example, value and momentum are negatively correlated with each other within and across asset classes or that investors are more likely to be risk averse when the skewness of the stock market is negative, etc. Understanding the basics of these 4 broad categories of stocks will help you begin to navigate through your Robinhood investments, and building out your own personal portfolio.
JoCee