Investing Styles: Which One Makes The Most Money?

In this Newsletter, I will present some of the most popular investing styles and discuss the relative returns you could expect from each. I have tried many, but not all of these styles. The reason I haven’t tried some of them is that they are dumb and stupid, obviously… ok maybe that’s harsh… let’s’s just say they didn’t not fit my financial objectives.

Popular Investing Styles

Winging It

This is how most small investors start investing.  There is no real strategy or plan. It’s surprising how often I see this approach. It’s generally based on buying stocks that are in the news, recommended by your dentist, or worse, plugged by a YouTube influencer. Returns are highly variable, but mostly abysmal. The reality is that most small investors have average returns of about 3-4%. 

Value Investing

This is the true “buy low, sell high” approach.  It involves finding undervalued companies that the market has overlooked.  These stocks generally tend to be boring and characterized by slower growth.  There are no standards to determine what is a value stock is, but any stock with a PE ratio below the market average is likely in this camp. 

Value investing is very old school but still very popular, and for many years this approach over performed.  However, it has been out of favour and underperforming for the last decade.  Returns have been ok, but not compared to the more aggressive growth investing.

Growth Investing

This approach is the opposite of value investing.  It involves buying high and selling even higher. The idea here is that fast growing companies will continue to grow fast and the price you pay for it is not that important.  A lot of technology companies fit into this category – exciting companies with so called “bright futures”. At the extreme, many of these companies do not make money but have high revenue growth. These companies are found at the upper end of the PE ratio spectrum. 

Surprisingly, this strategy has been the leader for most of the last decade (much to the chagrin of Value investors). If you look at Nasdaq 100 returns, which are primarily growth and technology stocks, it returned over 20% per year by average over the last ten years. Growth investors have been doing well but trends do not last forever and market reversals can be super painful. 

Momentum Investing

Momentum investing is a subset of growth investing.  It involves picking stocks based on price movements.  Momentum investors watch the charts to identify stocks that are suddenly gaining in price.  As more Momentum investors get in on the action, the price keeps appreciating.  Any stock will do here regardless of quality, PE ratio, sector etc. It’s all about price momentum and getting on the train.

Oddly, like growth investing, this approach has been successful despite the lurking dangers. In a rising market, which can last for years, it’s very possible to over perform for a while.  The dangers are obvious however, as any broad reversal in the market could create a huge train wreck.

All Weather Investing

This approach involves building a portfolio that will do well in any market. The rationale behind it is that no one can predict the future, so it’s best to be ready for anything the market throws at you.  Survival is the key idea here. 

This was a very popular approach at one time and is still followed by many.  In its purest form, a portfolio would comprise stock, bonds and gold. Some people add commodities (metals, orange juice, etc.) so there can be many variations.  All weather investing is a good approach if you distrust the market or cannot tolerate volatility.  This approach almost always underperforms as there is a cost to being so defensive. At the same time, it would be difficult to lose your shirt as there is a lot of safety built in.

60/40 Investing

This simple approach is a standard in the investing industry. It involves holding 60% stock and 40% bonds or other fixed income.  What could be better than equity returns mixed with fixed income for rock solid returns?

Similar to the all weather investing, this approach under performs the market in the long.  When interest rates were near zero for example, only the equity portion (60%) of the portfolio was pulling its weight, while the fixed rate part (40%) of the portfolio was generating almost nothing. With interest rates at ~ 5% the argument for this approach improves. In certain markets, 60/40 investing can outperform in the short run. Like many approaches that promise safety, you pay for that with lower returns over the long run.

Concentrated Approach

This approach involves only investing in a small number of high conviction stocks that you truly believe in.  The idea here is that if you rank all your stocks, why would you want to include any picks after 8 or 10? They’re only getting worse the further down the list you go.

Some of the most successful investors in history have had concentrated portfolios.  Most concentrated portfolios contain only 5-10 stocks.  The issue with this approach is that these portfolios are much more volatile, can underperform for long periods, but if done correctly, can out perform in the long run.  Warren Buffet adheres to this approach.  The problem is that most small investors are not Warren Buffet, and the approach is likely to fail if applied by an amateur. Returns will be very variable with such low diversification. Either really good or really bad.

Super Diversified

This approach is essentially the opposite of concentrated investing. It is based on the idea that no one knows the future (it could be bad), so there is safety in numbers. Portfolios of 60 positions and up are not uncommon.  This might also be a sign that you’re a stock hoarder. 

There have only been a few famous investors, like Peter Lynch, who managed to consistently beat the market with this approach.  Peter held hundreds of positions in his super successful Magellan fund 1977-1990.  It’s relatively difficult to beat the market with this approach because statistically the more positions you have, the more like the market you become.  This is not a bad thing, but if you want to over perform, it’s tricky.  If you’re not good at investing, your returns using this approach will not be so bad if you have a bit of everything in your portfolio.

Income Investing

Income investing concentrates on fixed income and dividend stocks. It is the turtle approach. Any form of fixed income (i.e. bonds, GICs etc.) will drag returns down in the long run. Big non-growing dividend companies will act like bonds, lowering your returns in the same way. 

This is approach is popular with those who do not like market volatility, prefer a safer risk reward ratio, and need a reliable income.  It’s best for older, retired people. The only way to get close to market like returns using this approach is through a dividend portfolio, where there is some growth in the company and some growth in annual dividends.  It’s not a bad approach if done this way.

Which Investing Style/Approach Makes the Best Returns?

As you can see, there are all kinds of ways one can invest in the market.  And these aren’t all of them; there are countless others like ESG (Environment/ Social/ Governance), passive, buy and hold, mutual funds, coffee can, etc. 

Unfortunately, there is no one right answer to this question because the market changes all the time. Momentum and growth is the flavour of the day now and has been for a long time.  But this will change.  For brief moments, like when the market falls for a couple of years, even fixed income can be the best choice.  Heck, even cash will outperform in that scenario. 

So What Is The Small Investor To Do?

My approach and advice is to stay adaptable and not focus too much on any one strategy. I prefer to stay 100% equity and well diversified across sectors, countries, and investing styles.  It’s ok to have expensive growth stocks, but I also want out-of-favour value stocks, some growing dividend payers, some international positions, and a couple of small speculative positions.

I realize that chasing popular stocks (growth and momentum approaches) has paid off for a long time, but this approach can pose the biggest threat to your financial future if you think that it will be successful forever. In a past newsletter, I may have mentioned that I murdered $100K during the dotcom bubble in 2000; I was running a growth/momentum strategy at the time.  In my opinion, its best to keep the portfolio running at a good safe compounding pace rather than risk a train wreck.

My Portfolio Summary

It’s been 2 months since the last newsletter (sorry) and the market has reverted to pushing forward with the usual expensive technology and communication leaders (growth/momentum).  Until that reversion, my portfolio was catching up fast, but with companies like Nividia continuously marking strong new highs, it’s hard to compete.  Unfortunately, the portfolio has fallen considerably in a very short time. 

To give you an idea of how crazy the market is, in the last month, Information Technology gained almost 13%.  This strong performance means that every other sector underperformed the SP500 index, which came in at 3.2%.

To make matters worse, returns for all other sectors except Communications (+2.4%) and Consumer Discretion (+1%) were negative!

It’s almost impossible to beat the market right now without taking on huge risks.  On a brighter note, if you invest in market ETFs, you are doing pretty well, however your market risk keeps rising.

I do expect the market to revert back to focusing on the more boring stocks as the market cannot stay stupid forever.

Marc’s Monthly Moves

Sell

• United Health Care – UNH, exited the position 64% return

Buy

• Shopify – increased existing position slightly
• Archer Daniels Midland – ADM increased position
• CVS – increased existing position slightly

Note that the changes above reflect some rebalancing of sectors.  There is no strategic change to the portfolio.

Marc’s Portfolio YTD Performance

• Portfolio return: 11.4 % (including currency gains)
• Portfolio return: 7.95 % (without currency gains)
• S&P 500 return: 14.57 %
• RSP ETF S&P equal weight 4.94 %
• TSX: 2.85%

The portfolio is under performing the S&P500 by 6.52 % points.