Orson Merrick - Understanding Core American Investment Ideas

Orson Merrick - Understanding Core American Investment Ideas
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Orson Merrick - Understanding Core American Investment Ideas

Compared to other investors in the world, American investors tend to believe that investing represents acquiring a portion of ownership of the company. Although some Americans also engage in frequent transactions, overall, their sense of ownership is more deeply ingrained than in other countries. Economic development and investor psychology both affect stock prices, but compared to other countries, economic development has a greater impact on stock prices in the United States.

Moving averages, balance sheets, cash flows, price to earnings multiples

I have used many investment terms to explain American stock investment because the US stock market is huge and complex, and various investment styles have gradually emerged in the market. Almost every investment style forms a small cultural system; just like a sports team has its fans, a specific investment style also has its fanatical followers, and those followers firmly believe that their investment style is “appropriate.” But is there actually the best investment style?

Compared to investors from other parts of the world, American investors tend to believe that investing in stocks represents them gaining partial ownership of the company, and they take pride in it. Although some American investors also trade frequently, overall, Americans are more inclined to believe that since they invest in a company’s stock, they are the owners of the enterprise. At least this concept is more deeply rooted than investors from other countries. Economic development and investor psychology can both affect stock prices, but compared to other countries, economic development has a greater impact on stock prices in the United States. In fact, this is a good thing because it is easier to predict the economic development prospects compared to predicting the psychological activities of investors.

Next, I will analyze for you several common and main investment styles in the US stock market.

Growth investing: investing in the stocks of companies whose sales performance is expected to increase. After the company increases its profits, its stock price can correspondingly rise. This is the easiest investment style to understand. For example, the stocks issued by Tesla (176.19, -0.56, -0.32%) and LinkedIn (195.96, 0.00, 0.00%) are typical growth stocks in the United States. Usually, growth investors are not worried about buying such stocks at low prices; they are more concerned about the satisfactory performance of the stocks in the future.

Pros: Growth investments can generate substantial returns. Usually, only growth investors would say that a stock’s yield can reach up to 1000% or even 5000%. It is difficult for other investment styles to have such high returns.

Cons: On average, the return on growth investment is not as high as that on value investment. The problem with growth investing is that this investment style is too popular, with too many buyers driving up stock prices. There may be a final company that becomes a big winner, but there can also be dozens or hundreds of losers.

Important skills to cultivate: If you no longer invest in growth through speculation, then determining which companies are the ultimate big winners before becoming a true big winner is the ability you need to possess.

Value investing: Value investors buy stocks at the lowest possible price. They prefer to invest in the stocks of companies with low current stock prices but huge development potential. They will value the intrinsic value of stocks and only buy them after discovering stocks with trading prices lower than their valuation and active trading, and then they expect their stock prices to rise. Value investors may also evaluate the value of a stock by estimating its future cash flows or simply using indicators such as price-to-earnings multiples. They believe that during the emotional periods for investors (market corrections and bottoms), the market is overreacting, so they try to buy stocks that are unpopular and may be overly overlooked by the market. They also hope that the market underestimates the future development potential of companies issuing such stocks.

Pros: On average, value investing performs better than growth investing. A famous academic study on “Reverse Investment, Extrapolation, and Risk” by Lakonishok, Schleifer, and Vishny (1994) also showed that value stocks with low P/E ratios and slow trading volume growth have a higher investment value than attractive stocks with high P/E ratios and an annual trading volume growth rate of 11%.

Cons: Value investing relies on valuation, and there is a high possibility of valuation errors. Because value investors (as all investors do) do not know for sure when stocks will experience a downturn or their best performance, they often buy stocks too early when the stock price is still falling and sell them too early when the stock price is still rising.

Important skills to cultivate: Value investors need to have the courage to buy unpopular and unpopular stocks that are not favored by the majority and continue to hold their stocks during the company’s difficult times. When all articles and analyses related to a company hold negative views, it may be difficult to go against mainstream thinking, but that is precisely why value investing can yield returns.

Investing from a macroeconomic perspective: If you hear an investor talking about “currency,” “gross domestic product (GDP),” and “factory orders” during a conversation, then it is likely that the investor you are communicating with is a “macroeconomic” investor. But in fact, only a small number of large, professional institutions and firms have pure macroeconomic investors. Due to the ease of understanding of macroeconomic events and their subtle impact on almost all types of investments, financial news enjoys discussing topics related to macroeconomics. Macroeconomic investors are more inclined to invest in stocks, funds (not individual stocks), bonds, currency, real estate, and interest rates.

Pros: This investment style is easy to understand. Because investing from a macroeconomic perspective involves fund or group investments, investors do not need to delve into individual stocks.

Cons: This investment style places several bets on changes in currency or interest rates, and its risks are quite high, making it more difficult to define whether this investment relies on luck or skill.

*Important skills to cultivate: the ability to predict certain things, such as interest rates, government measures, and patterns of public expenditure. It is difficult and almost impossible to possess this ability.

Technical analysis investing: refers to seeking patterns of changes in the price and trading volume of a certain stock before deciding to buy or sell it. Usually, it is to look at the pattern or cycle of stock price changes, or compare the recent changes in stock price with the past, or compare the recent changes in stock price of a certain stock with those of other stocks. Most technical analysts agree with the view that market volatility, or the regularity of market operation, is caused by investor psychology.

Pros: Academic research has shown that variables are a reasonable element in investment, so certain aspects of technical analysis may be meaningful. The two forces that truly drive market operation are human psychology and reversal, and technical analysts are also trying to leverage these two forces.

Cons: Technical analysis only identifies patterns or cycles of changes that have already occurred, which are sporadic and cannot predict future changes in stock prices. Therefore, many analysts believe that technical analysis is not scientific.

An important skill to cultivate is the ability the ability to put aside the controversy over whether technical analysis is meaningful. Many technical analysts suggest that followers of this investment style need to master the important skill of ignoring investor sentiment changes and correctly following systematic trading principles.

American investors also use some other investment styles, such as:

Best investing: Invest in stocks of high-quality companies and hold them for the long term. A cheap stock price is not very important; the most important thing is the quality of the stock.

Quantitative investing: hedge fund investments often use this investment style. Quantitative investment will use various mathematical models to predict asset prices.

Dividend investing: Dividend investment refers to investing in the stocks of companies that pay dividends in cash annually. In the United States, this type of stock is highly favored by retirees.

Growth Investment at Reasonable Prices (GARP): This investment style is a mixture of growth investment and value investment, and investors in this investment style will want to buy stocks at low prices. This type of investment is usually applied to the stocks of such companies; they do not have as much appeal as the most famous, rapidly developing growth enterprises.

Deep value investing: mainly investing in stocks of companies that are struggling and under-performing and whose trading prices seem to be very low. This may sound strange, but if the poor performance of these low-quality companies can be moderately improved, their stock prices are expected to rise significantly.

Investment for special circumstances: Investors only invest in the stocks of a company when it encounters special circumstances. This type of investor usually starts buying their stocks when the company experiences complex events such as bankruptcy, restructuring, merger, or spin-off. Because most investors are afraid of facing complex events in the company, they believe that as long as they put in some extra effort to understand the beginning and end of these events, their investment still has an advantage.

Market-neutral investing: mainly refers to those professional investors who eliminate the impact of the market itself through balanced trading. Usually, they reflect the entire industry or market by short selling an index fund, and then they buy stocks that are comparable in quantity to the short selling and that they are very interested in. The purpose of holding short positions is to weaken the influence of market (or industry) performance, thereby creating profit opportunities for investors who have invested in high-quality companies.

Short-selling investing: Short-selling investors profit by relying on a decline in stock prices, and they need to expose negative information about the company. In the United States, short-selling investors are usually very popular because they can quickly expose a company’s bad behavior, which can help purify the market.

Social responsibility investing: refers to investing in stocks of companies with strong philanthropic properties, such as those that take on responsibilities such as improving the environment, treating employees and suppliers favorably, and expanding shareholder rights. Social responsibility investors refuse to purchase stocks of companies they believe have engaged in misconduct, including importing goods from factories that use child labor in other countries or producing products that are harmful to health, such as cigarettes. Americans have a strong belief in ideology, so this investment style has been popular in the United States for the past 10 to 15 years, and its popularity has even surpassed that of Europe.

Investment based on enterprise size, industry, or geographical location: Many fund investors invest their funds in a specific type of company (such as only investing in small companies), a specific industry, or a geographically specific enterprise.

The above are only partial examples of American investment styles, and we cannot list them all here. If you are confused about this now, don’t worry: for a long time in the past (and in the short term), the stock prices of American companies were linked to cash flow and industry profits. That is to say, when investing some “big money” that can drive stock price fluctuations, many times it is based on predicting the future cash flow of the industry and then investing in some traditional investment styles. If you have the opportunity to communicate with fund managers who manage those “big money” funds, many of them may give you this advice: for the US stock market, don’t spend so much time worrying about what other investors will do. You should spend more time thinking about the future economic outlook of the companies you are researching.

But when you need to make your own investment decisions, you need to find the investment style that suits you. We hope that the introduction of these investment styles can be helpful to you, and we also hope to guide you step by step to form your own investment style and investment philosophy system. We hope that you can gain profits from investing in US stocks!

Author: An Introduction to Orson Merrick

A senior investment expert in the UK who has served as Vice President of Merrill Lynch and has over 19 years of experience in the investment market. Having a unique trading style, the medium- to long-term investment return is 16% higher than the S&P 500 index level, and this record has been maintained for 10 years.

He is also the Chief Analyst of Polar Capital Holdings Limited in the UK, who was promoted to Senior Partner over 15 years ago. During this period, he helped clients provide the best investment concepts and professional knowledge, as well as develop and protect their family and personal investment assets, to achieve their goals and solutions. Now, he is happy to share with readers his knowledge about US stock investments.