Finding the Right Investing Strategy for You

There are tons of investment books out there ready to help new investors find the right strategy for their investment journey. However, for someone new to investing, finding their true north in investing – in other words, the strategy that fits them the best – requires patience and some experimentation. After all, how would you know what you’d prefer before you even try it out?

So, let me summarise what most investment books are eagerly trying to tell you. Hopefully, you’ll get a better sense of the right strategy for you.

1. Income Investing

If you prefer to see cash or need a certain level of additional cash flow outside the income from your day job to sustain your lifestyle, you might be drawn toward income investing.

This strategy simply involves investing in a dividend-paying share for its dividends which you might then spend or reinvest. The ideal dividend share has businesses which can generate consistent earnings and cash flow, which can in turn lead to consistent dividends.  So, steady and boring companies would be the name of the game for successful income investing.

Real estate investment trusts, and shares like Starhub Ltd (SGX: CC3)Singapore Press Holdings Limited (SGX: T39) and Singapore Telecommunications Limited (SGX: Z74) can be thought of to have at least some of the characteristics which income investors seek.

Free cash flow for Starhub, SPH, and SingTel

Source: S&P Capital IQ

As you can see in the chart above, Starhub, SPH, and SingTel have managed to generate consistent free cash flow over the years and that characteristic can make them attractive candidates for further study from income investors.

2. Growth Investing

Maybe you prefer finding companies with explosive growth potential. If so, then growth investing is your type of thing. Be warned though, this investing strategy might be more exciting, but it’s certainly not for the faint-hearted.

This is because the profitability and stock price of such companies might be volatile from quarter to quarter and investors need to be mentally prepared to ride through those huge ups and downs. Sarine Technologies Ltd (SGX: U77) can be considered a growth share with its profits jumping by 300% from 2005 (the year it got listed) till today. Along the way, its shares have also gained 917% in price since its listing.

But between 2005 and today, investors had to endure a peak-to-trough decline of more than 90% in Sarine’s share price during the Great Financial Crisis of 2007-09. That’s the kind of volatility growth investors might have to live through (though Sarine is admittedly something of an extreme example).

3. Value Investing

If you’re the type of person who loves a bargain, then value investing might be more suitable for you. Value investing involves finding companies which are selling at very cheap valuations (for instance, such shares might be carrying very low price/earnings ratios). Often, such value-shares are faced with all kinds of business issues and challenges, but their prices have become cheap enough for investors to justify taking on the risks.

By virtue of their low valuations, shares like The Hour Glass Ltd (SGX: E5P), and Frasers Centerpoint Ltd (SGX: TQ5) might be companies that would interest a value investor for further study. The two shares carry trailing price/earnings (PE) ratios of 8.0 and 8.1 currently. For some perspective, the SPDR STI ETF (SGX: ES3), a close proxy for the fundamentals of Singapore’s market barometer the Straits Times Index (SGX: ^STI), is valued at a PE ratio of 13.5.

A Fool’s take

No matter what strategies you think suits you best, the most important thing to remember is that we are all investing intelligently if we invest with the notion that a share is not just a meaningless piece of paper, but a partial ownership stake in a real business.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim owns Frasers Centrepoint Ltd