Trading is flashy as hell but when you look at the numbers, the wealthiest financier on the planet is a value investor. Warren Buffets buys assets he believes to be under priced and he holds them for years or decades. This is how he grew Berkshire Hathaway into the powerhouse it now is.
Interestingly, unlike trading, I generally believed there was only one approach to investing. You’re holding onto stuff for years, what is there to know? But it turns out there are actually two different ways to look to approach your investing. Each strategy has its own strengths and weaknesses. Let’s have a look.
Trend investing is a strategy whereby an investor places his capital into a market that is clearly uptrending. Then, on the other side, he waits to sell until the market is clearly downtrending. A few thoughts on this. The first is that this investor purposefully misses both the bottom and the top of the market. He’s leaving money on the table! Well, yes, but not really. Not really because he’s only deploying his capital into a market that he expects to reward him quickly. When you think about a value investor buying the bottom, he may catch it perfectly, the asset may be ludicrously undervalued, but the market might go sideways for years! Those are years when he could have put his money to work in some other market.
People love to call bottoms and tops but in reality, nobody knows a damn thing. So with trend investing, since you’re not trying to sell the top, you will stay in and the market might go a hell of a lot higher than what anybody expected. And you will benefit whereas the value investor might have already sold because he believed the top was in.
The downside of course is that sometimes markets don’t under or over perform. Sometimes they do what people believe they will and in this case, by not buying near the bottom and selling near the top, the value investor leaves a good chunk of change on the table.
- Less risk, since you’re buying into a market that is clearly trending up
- If a market over performs you gain exposure to it
- In a bear market if an asset under performs and goes lower than anybody expected, you’re not bought into it
- Potentially leaving money on the table as you’re only capturing the middle part of the price movement, not the top and bottom
The other approach is value investing. That is, buying an asset which is clearly undervalued. In this situation the investor does not care so much whether it trends lower, he is simply placing his money into something which he believes, rationally, must go up in the future. He may try to time bottoms and tops or he may hold his assets for the long term, through multiple market cycles. Although I am unfamiliar with the stock market, I know that PE ratios are used along with a host of other tools to determine what assets are undervalued. In crypto there is no standard valuation model so it’s more difficult. Value investing is what most hodlers do, whether they realize it or not. It’s a fine strategy and it created the world’s wealthiest man, for a while.
- More potential upside as bottoms can be bought and tops sold. Or, at least, an investor can try to time those correctly
- Dead simple. No debating about exactly what an uptrending market is, when the reversal has happened, etc.
- Riskier. You can buy an undervalued asset and find out that it can still go quite a bit lower and the market can go on for quite a bit longer
Anyways, that’s just a brief overview of the types of investing. Obviously there’s not much info here but hopefully it at least gives you an idea of what’s out there in terms of strategy. Now you can go learn more about it from more experienced people than myself. Good luck!