Investment - Developing Your Own Investment Style

Source: The Motley Fool

Each investor's style is unique. One Fool reflects on his own development.

We buy shares in a company because we think they are going to go up, right? But how we evaluate that judgment varies between individuals, and most investors develop an investment style that is unique to them.
Generally, successful investing boils down to buying something for less than it is actually worth, and never overpaying, then selling it when it is priced too highly. But how that 'something' is defined can vary between individuals.

It's cheap, but what is it?

Looking back, I can remember earlier investing agonies as my style evolved. Of course, that's a never-ending process, but some fundamental principles adopted then, remain in my style today.
Luckily for me, I discovered Mary Buffett's book Buffettology in the late nineties, before obtaining sizeable amounts of capital for investing. In fact, the book inspired me to make the changes in my own business that led to its success and profitable sale.
From the book, I learnt about the differences between what Warren Buffett calls 'Commodity' businesses, with lots of competition and no pricing power, and 'Excellent', or 'Consumer Monopoly' businesses with profitable market niches and strong brands.

Qualitative and quantitive

A year later, I discovered The Motley Fool website and rapidly absorbed as much as possible about investing from its content. That led me to buy more investment books, and one of the first was Ben Graham's The Intelligent Investor, which gave me a good foundation in how to recognise a share price that was mispricing the underlying business.

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It was a good grounding in basic value investing, but I wanted more. Graham left some of my questions unanswered. For example, he never seemed to place much emphasis on analysing the quality of a business or its ability to grow, seeming to restrict analysis to whether it was selling cheaply or not relative to its current assets and earnings.
During that time, I'd been reading Buffett's shareholder letters and realised that he invested differently to Graham. In fact, the idea of not considering qualitative aspects of the business was counter-intuitive to me and I wanted to invest more like Buffett.
However, a real breakthrough came, for me, when I read Peter Lynch's book, One Up On Wall Street. For the first time I came across a way of beginning to value growth prospects with the idea that 'the P/E ratio of any company that's fairly priced will equal its growth rate.'
Of course, British investor Jim Slater also utilised the price to earnings growth ratio or PEG, and its use is fleshed out in his famous book The Zulu Principle.

Six sense

Lynch has a fantastic grasp of the way share prices behave within stock markets and learning of his six classifications for companies was something of an epiphany, for me.
He reckons that all companies can be thought of as either:

• Slow Growers
• Stalwarts
• Fast Growers
• Cyclicals
• Turnarounds
• Asset Plays. 

I have to say, that categorising my portfolio in that way was very insightful.
Using the technique in conjunction with Lynch's other great tip, which is to write down your investment plan for each holding, is part of the mainstay of my investment approach to this day.
Lynch urges us to write down what we expect an investment and its underlying company to do, then, if it doesn't, you can react accordingly.
Equally, you may gain insight into knowing when you have won, so that you can sell an investment: one of the hardest parts of successful investing, in my view.

Flexibility

Although I have formulated a framework for my investing over the years, it is equally important to treat every investment opportunity as a unique situation, and not to attempt to pigeonhole your thinking, I reckon.
For example, Warren Buffett is famous for his long-term approach to holding growing businesses. However, that's only part of his story. He'll wade into short-term arbitrage or deep-value, low quality business opportunities at the drop of a hat, too, if he believes there's a decent return to be had.
Good luck with the evolution of your own investment style, and may it serve you well.