When it comes to investing, it’s always a great idea to take a little time to work out the best strategy that works for you.
That goes for anyone new to ASX investing, or those already in the game who think it’s time to re-evaluate how things are playing out.
Coming back to reassess your options can save you a lot of headaches further down the track, and it can also work wonders for your own personal wealth.
It could be that it’s time to rethink what you’d like to achieve out of your portfolio, or what you would do if your circumstances might change.
Being an Australian investor means you have access to a variety of strategies that could help you successfully invest on the ASX, and we’re excited that we get to share them with you.
To give you more of a well-rounded picture, and to ensure we dot the Is and cross the Ts, we’ll also be giving some Australian-centric examples of ASX-listed companies for each strategy type, as well as successful investors who have used these strategies in the past.
After all, it’s much easier to trust an idea once you’ve seen it accomplished by someone else, right?
Please note, however, that the companies mentioned should not be taken as investment recommendations, but merely examples for you to start your own research.
Alright, so without further ado, let’s drive right in!
Buy and hold strategy
‘Our favourite holding period is forever.’
-Warren Buffett
First up, we’re looking at the ‘buy and hold strategy’. It’s probably one of the most widely known strategies because it holds strong as a very fair and valid approach for investing.
‘Buy and hold’ is a long-term strategy where investors buy shares in a company and hold them for an extended period.
It’s a strategy that’s particularly useful for companies with strong fundamentals and a solid track record of performance.
A great example of a company that fits this description is BHP Group [ASX:BHP], one of the world’s largest diversified mining companies. You’ve probably heard about BHP. It produces a range of commodities, including iron ore, copper, coal, and petroleum.
It’s often mentioned on the usual news channels on a fairly regular basis.
A notable investor who has used this strategy is Warren Buffett, one of the world’s most successful investors across the ages. With a net worth of $108.6 billion, Buffett is the fifth richest man in the world.
Buffett has been a long-term investor in Coca-Cola for decades, making the first Coca-Cola trade in late 1998. Holding 400 million Coca-Cola shares, Buffett’s stake is worth US$23.8 billion, more than 7% of Coca-Cola’s entire equity portfolio.
Buffett bought his first stock at the age of 11, and by 13 was already filing tax reports.
Another investor that is known to have used the buy and hold strategy is Benjamin Graham. Graham lived through the Great Depression and had his fair share of financial troubles throughout his family life. Such a background caused him to adopt a careful, logical approach to investing.
Some of the most well-known companies that Graham invested in were Winnebago Industries and steel and metal companies like the Commercial Metals Company and Olympic Steel.
However, buy and hold was not the only strategy Benjamin Graham used…more on that later.
Dividend investing
‘My method is to take the universe of stocks and then to eliminate those that are unlikely to pay dividends in the future.’
-John D Rockefeller
Another strategy you might have heard a bit about is the ‘dividend investing’ strategy. This strategy involves buying stocks in companies that pay regular dividends.
Investors can reinvest these dividends to buy more shares, compounding their investment over time.
An excellent example of a company that suits this strategy is Rio Tinto [ASX:RIO], which pays a consistent and ever-growing dividend to its shareholders each year.
RIO is one of the world’s largest miners of iron ore, aluminium, copper, and diamonds. It’s up there with the likes of BHP, which happens to be its main competitor.
A successful investor that has used this strategy is Peter Lynch, who famously managed the Fidelity Magellan Fund. Peter Lynch was appointed head manager of the fund at 33 and was so successful that he retired 13 years later, at 46.
John D Rockefeller, on the other hand — the guy who likes to ‘take the universe of stocks’ — is known, to this day, as the richest person in the world. To some he’s even considered something of the superhero of the business world.
Even though his time was in the late 1800s to early 1900s, he’s still measured against certain metrics that are able to convert his net worth to modern times. Put it this way, if he were still alive today, Rockefeller’s net worth would be somewhere around US$400 billion.
Rockefeller had a ‘secret love’ of the dividend strategy, and he’s remembered for investing in Chevron, Conoco, Exxon, Mobil, and Amoco. All of which followed Rockefeller’s main business, The Standard Oil. Rockefeller was a majority owner and ensured two thirds of company profits would be paid in dividends. All up, Rockefeller had an annual untaxed income of US$58 million in 1902 (about a billion dollars in today’s money).
You should be aware, however, that dividends are never guaranteed and any company paying dividends can amend or cease to pay dividends at any time.
Value investing
‘Price is what you pay, value is what you get.’
-Warren Buffett
Yes, it’s our friend Warren Buffet again. Well, we wish he was our friend anyway.
Warren Buffett and Benjamin Graham used this strategy. Graham was widely known as the ‘father of value investing’, and he also wrote quite a few books about it. Warren Buffett was actually mentored by Graham at Columbia Business School.
‘Value investing’ is a common sense strategy that involves plenty of research and judiciousness to evaluate and buy shares in companies that are undervalued by the market.
Investors can identify undervalued companies by looking at various metrics, like price-to-earnings ratios, price-to-book ratios, and dividend yields.
An excellent example of a company that has suited this strategy is Fortescue Metals Group [ASX:FMG], which has a relatively low price-to-earnings ratio compared to its peers.
FMG is a large producer of iron ore in Western Australia. In fact, it’s the fourth-largest producer of iron in the world. As a stock option with a good return, FMG has been deemed highly profitable, reaching a share price of $22.52 in early March 2022, with some analysts predicting this to climb to around $36 in another five years, to 2028.
Growth investing
‘The four most dangerous words in investing are: “this time it’s different”.’
-Sir John Templeton
This strategy involves buying shares in companies that are expected to grow significantly in the future. Investors can identify growth companies by looking at metrics like revenue growth, earnings growth, and market share.
A great example is Pilbara Minerals [ASX:PLS], which produces lithium, a crucial component for electric vehicle batteries.
Why Pilbara? Well, demand for lithium is expected to grow significantly as the world shifts toward renewable energy.
According to the OCE — the Office of the Chief Economist — global lithium is expected to rise more than 40% in the next couple of years, to around 1,091,000 tonnes by 2024.
So, who has this investing strategy already worked for?
Successful investors include Peter Thiel (co-founder of PayPal) and Cathie Wood, founder of Ark Invest, a firm that specialises in investing in innovative companies with disruptive technologies — think Tesla, Square, and Teladoc.
Thiel was an early investor in the now social media giant Facebook. He invested US$500,000 in the company in 2004, and by the time it went public in 2012, Thiel’s investment was worth more than US$1 billion.
Thiel has also invested in other high-growth companies, including Airbnb, SpaceX, and Palantir.
Wood and Thiel share an investment philosophy that focuses on investing in companies with significant growth potential and disruptive technologies.
Momentum investing
‘The trend is your friend until the end when it bends.’
-Ed Seykota
This strategy involves buying shares in companies that have recently outperformed the market.
This is how it works. Ideally, investors can identify momentum stocks by looking at recent price movements and trading volumes.
The theory behind momentum investing is that stocks that have performed well in the recent past are likely to continue performing well in the near future, while stocks that have performed poorly may continue underperforming.
Momentum investors typically look for stocks that have experienced a significant price increase over the past few months and appear strong compared to the overall market or their industry peers.
An example at the time of writing is Mineral Resources [ASX:MIN], a diversified mining company that has seen its share price increase steadily in the past year.
But it was Whitehaven Coal [ASX:WHC] that was the star of 2022, its share price having exploded 241.3% from $2.76 in early 2022 to $9.42 by the end of the same year.
Investors who have been met with success when using this strategy? One would include William O’Neil, founder of the Investor’s Business Daily, which focuses on financial news and stock market analysis.
Also, you’ll have seen from the quote up there, another investor known for using momentum-based trading strategies is Ed Seykota. This man was one of the pioneers in the ’60s and ’70s who would use computer programming trading systems to form technical analysis and make investment decisions based on those. He was also a firm believer that markets were driven by human emotions.
Contrarian investing
‘Be fearful when others are greedy and greedy when others are fearful.’
-Warren Buffett
Oh, look it’s Buffet again. We do like a bit of Buffet.
Now then, ‘contrarian investing’ — if you are familiar with our services then you may see a bit of this kind of strategy at Fat Tail Investment Research, where resident contrarians are abound.
It may sound counterintuitive, but this strategy involves buying shares in companies that are out of favour with the market.
It makes more sense when you think more about what you’re actually doing here — investors can identify contrarian stocks by looking at low price-to-earnings ratios, low price-to-book ratios, and yet, they can also look underneath it all at the high dividend yields.
These can be easy to ignore for other investors, who might get caught up in the scary red lines, and the popularised ‘bad narrative’ or gossip floating about.
A fair example is Northern Star Resources [ASX:NST], a gold mining company that has seen its share price decline in recent years. With gold falling out of favour with investors lately, this has led to lower valuations for companies like Northern Star.
And yet, this particular gold mining company has a low price-to-earnings ratio and a high dividend yield. Also, despite the challenges faced by the industry, NST has maintained a strong financial history, with solid revenue growth, cash flow, and a fair healthy balance sheet. Not to mention an experienced management team to lead it through its endeavours.
These are exactly the sorts of things to look out for.
Add to the fact that gold can still be considered to be a ‘safe haven’ stock, often used to hedge against market volatility.
A successful investor who has used this strategy is David Dreman, who founded Dreman Value Management. He was also a well-known writer and published several influential books, including Contrarian Investment Strategies: The Next Generation and The New Contrarian Investment Strategy.
There are also several Australian contrarian investors who have made a name for themselves, such as Kerr Neilson, co-founder of Platinum Asset Management, a successful Australian investment management company. Hamish Douglass, co-founder and CEO of Magellan Financial Group. And John Hempton, founder and chief investment officer of Bronte Capital Management.
Identifying such stocks is not easy however, and such investing can be high risk.
Commodity trading
‘Commodities tend to zig when the equity markets zag.’
-Jim Rogers
As its name suggests, this strategy involves buying and selling commodities such as gold, silver, oil, and copper. Investors can profit by speculating on the future price movements of these raw materials.
Evolution Mining [ASX:EVN] is an excellent example of a company suited to this strategy. Evolution is an Australian gold miner that produces gold from various mines in Australia and Canada.
Others we have discussed in prior sections have also historically done well for investors in the commodities category. These include the aforementioned diverse iron and oil giants BHP Group [ASX:BHP] and Rio Tinto [ASX:RIO], as well as the notable iron hero Fortescue Metals Group [ASX:FMG] and iron and lithium explorer, Mineral Resources [ASX:MIN].
A successful investor who has used this strategy is Jim Rogers, who co-founded the Quantum Fund with George Soros, a very successful Hungarian investor. What ensued was a fund that achieved outstanding returns over the next decade.
A little closer to home, we have Andrew Forrest, who has made his fortune in the Australian mining industry, Gina Rhinehart, one of the richest women in the world and owner of Hancock Prospecting, and Clive Palmer, politician and founder of Mineralogy, a mining company with interests in iron ore, coal, and other critical minerals.
To get more insights into commodity investing, you might like to check out a recent report from our resident geology and commodities expert, James Cooper, editor of our Diggers and Drillers newsletter.
ETF investing
‘Owning the stock market over the long term is a winner’s game, but attempting to beat the market is a loser’s game.’
-Jack Bogle
Luckily for ETF investors, much of the guesswork and the stress can be taken out of market movements and individual companies that contribute to them, because in adopting this strategy…they’re managed by someone else.
This strategy involves buying exchange-traded funds (ETFs) that track various indices and markets. ETFs can provide investors with exposure to a diverse range of stocks and commodities with relatively low fees.
There are many sound ETFs to choose from out there, some of which include the iShares S&P/ASX 200 ETF [ASX:IOZ], which tracks the performance of the top 200 companies on the ASX, or even BetaShares Australia 200 ETF [A200], which also tracks the S&P/ASX 200 Index, but with a lower management fee.
A successful investor who has used this strategy is John ‘Jack’ Clifton Bogle, who founded the Vanguard Group, one of the largest investment companies in the world. In fact, it was Mr Bogle who first created the first index fund for individual investors.
Australian author of Motivated Money and investment commentator Peter Thornhill was also known to have used the EFT investment method. He retired on $400k in annual dividends by age 53.
Others include Noel Whittaker, another prominent financial advisor who can be found in Australian newspapers, and who also penned Making Money Made Simple among others. Whittaker has recommended index funds and ETFs for years.
Then there’s Paul Clitheroe, financial advisor, TV personality, and author of Making Money and The Road to Wealth. Clitheroe often airs his pro-EFT views on television and radio.
All the above examples have been powerful advocates for the benefits of passive investing.
Small-cap investing
‘Small caps are typically the most dynamic companies in the market, and their growth prospects are often underestimated.’
-Joel Greenblatt
This strategy involves buying shares in small-cap companies that have the potential to grow significantly in the future.
‘Small caps’ are essentially companies with smaller capitalisations. The range for a small-cap is generally considered between $300 million to $2 billion.
Investors can identify small-cap stocks by looking at companies with low market capitalisation and low trading volumes.
A great example of a small-cap company is Silver Lake Resources [ASX:SLR], an Australian gold miner that produces gold from various mines in Western Australia. Silver Lake wholly owns and operates the Deflector and Mount Monger gold camps and had sales guidance of 240,000–250,000 ounces of gold in FY2021.
One of the more notable investors who have used this strategy include Joel Greenblatt, who founded Gotham Asset Management. The small-cap investing method can also work hand-in-hand with value investing, which Greenblatt was also known to use.
Greenblatt’s flagship Gotham Enhanced Return fund delivered an average annual return rate of 16.8% (net of fees) from 1985 through to 2020.
Other investors successfully using the small-cap investment strategy include Geoff Wilson of Wilson Asset Management, who has a firm which focuses on small and micro-cap stocks heading for value growth, and Chris Prunty, founder and portfolio manager of QVG Capital, another small caps investment firm which also dabbles in mid-caps.
Small caps, however, are the riskiest stocks on the ASX and you should never invest more than you are prepared to lose on such stocks.
Technical analysis
‘Charts are the footprints of the big money.’
-Martin Pring
This strategy involves using charts and technical indicators to identify patterns in stock prices and predict future price movements.
Investors can use technical analysis to identify trends and support resistance levels.
Lynas Rare Earths [ASX:LYC] is an example of a company which has performed well under this strategy, another commodity example, Lynas produces rare earth elements used in various high-tech products to support zero carbon-emissions solutions.
Other good historical examples would include CSL [ASX:CSL], a major plasma-based and vaccine specialists and Telstra [ASX:TLS], one of Australia’s most iconic telecommunications corporations.
Generally, these are companies that have performed well over time.
For example, CSL is a stock that shows ongoing steady growth throughout its time since listing on the ASX in 1994. The biotech has surged over the years, you need only check the charts to see the steady progression, share prices moving up from around $54 in early 2013, to now, 10 years later, circling the $300 mark — per share!
What’s more, analysts at Morgan Stanley are predicting 2023 to be the ‘break-out’ year for CSL, with shares expected to climb even higher.
On the other hand, while Lynas gained around 620% between March 2020 and early 2022, so far in 2023 the rare earths miner has been repeatedly hitting 52-week lows. The consensus is that continual cost increases in 1H 2023 have severely squashed its budget, which is a story experienced by many businesses this year.
Let this be a word of caution, making predictions can only take you so far, for so long. Just because a company has historically performed well doesn’t always guarantee success. There’s always going to be some risk involved, whatever strategy you choose.
And yet, done right, there are many investors who have found this strategy a success. Among them include John Murphy, who wrote the book Technical Analysis of the Financial Markets and Louise Bedford, a trader and teacher of technical analysis who wrote best sellers Trading Secrets, and The Secret of Candlestick Charting.
John Murphy is considered one of the most successful technical analysts of our time and was one of the first to recognise the importance of intermarket analysis, whereas Louise Bedford has been trading with this strategy for more than 20 years and is a popular speaker and contributor to Australian financial media.
Don’t forget old Ed Sakoya, who we chatted about earlier, and who was among the computing pioneers that got computers assessing companies via thorough technical analysis.
In fact, it’s probably fair to say all investments strategies call for a bit of technical analysis — after all, it comes with rigorous research, which is the main strategy all successful investors must follow.
Have you found which strategy, or which investor, resonates most with you?
As you can see, there are a variety of investment strategies that investors can use to invest on the ASX.
Each one has its strengths and weaknesses and carry their own set of risks. Investors should ensure they fully understand the risks associated with each approach, conduct their own research, and choose a strategy that aligns with their investment goals and risk tolerance.
Diversifying your portfolio and investing in a range of strategies, can assist in minimising risk.
There have been many successful investors that have used a range of strategies to achieve their investment goals, and by studying their approaches, we can learn valuable lessons about investing in the ASX.
However, it’s important to remember that every investor has their own unique approach, and what works for one investor may not work for another.
It’s also worth noting that most investors use a combination of strategies, once again highlighting the beauty, and wisdom, in diversity!
If any of the above strategies tickled your curiosity enough to leave you wanting to know more, why not look more into them by searching the web, stalking the legacies that used them, or pick up one of their books?
Of course, you can always find out more about investment strategies, general advice, company analysis and more here at Fat Tail Investment Research. By joining one of our subscription services, you could have much more than strategies and legacies at your fingertips, you can get the intel, and maybe even the timely tip-off that could send you ahead of the curve.
