6 investment strategies for beating the markets

The beauty of today’s global investing ecosystem is that it is no longer reserved just for the Wall Street big sho(r)ts. The levelling of the investing field, to which eToro has made a significant contribution, has enabled the average Joe and Jane to participate in the highly competitive game of investing, almost shoulder to shoulder with what were once revered, adored and respected “Suits”.

However, just because everyone can now comfortably lean back on their brand new gaming chair and shuffle stocks while munching on a bag of salty crisps, doesn’t mean they should blindly fire at will. We can have all the fancy trading equipment that money can buy, but without also being equipped with basic knowledge of investment strategies, the first won’t matter much. So to help us get better equipped on our investment journey, I thought I’d run us down a list of six strategies that every investor should have in their toolbox. 

Why have a strategy at all?

A strategy is like a game plan that gives our portfolio management a clear direction, while also helping us better navigate the ever-changing market conditions. Generally speaking, to get from any point A to any other point B, the following three things are required:

  1. A goal (in this case it could be saving for retirement, a new gaming console or making some income on the side to help pay the bills);
  2. Direction (this is our general investment strategy and thesis);
  3. Means to get there (this would be the components that make up our portfolio).

Throwing money into the markets without having first clarified these three steps is like sailing out in the ocean without knowing where we’re going, why we’re doing it and how the hell we’re going to get anywhere. Yes, I know, some people call this “an adventure”, and yes, supposedly it can be loads of fun – but I could probably think of better ways to have fun while not necessarily blindly risking your (or other people’s) life savings. So, let’s dig in.

Value investing

Perhaps a simple way to describe value investing is to liken it to bargain hunting. If you’re a frequent shopper at your local flea markets or bazaars, you’re probably already a value investor. The basic principle behind this strategy, which is often linked to the approach made popular by Warren Buffet, is simple: acquire an asset that is miss-priced (overlooked) by the market or – to put it in fancy investing words – is selling below its intrinsic value.

“Oh, doh! What kind of a strategy is this? Of course I’m not gonna go and buy something that is selling higher,”  I hear you say. Well, the thing is, in order to assess the (intrinsic) value in a certain stock, you usually need to do quite a bit of research, be able to read balance sheets and understand how they relate to the future prospects of the company in generating cash flows. It also requires being immune to any emotional, irrational ways of thinking since the very ability to bargain hunt is predicated on exploiting market irrationalities that have caused the stock to be overlooked or miss-priced.

For a beginner investor, value investing is a challenge because it requires a lot of reading (at least in the beginning). However, those of you curious and patient enough to invest in learning the basic principles of value investing are likely to be making an investment that will keep yielding returns for the rest of your lifetime. One thing is for sure – in order for this strategy to really pay off, you must play the long game. And by long, I don’t mean three months but rather five, 10, or even 50 years –  all the while refraining from frequent trading. I wonder where exactly is the fun in that, right?

Growth investing

If value investing is bargain hunting, then growth investing is potential hunting. Growth investors hunt for innovative companies in fast growing, emerging industries that have strong upside potential or already boast above-average increase in revenues (and sometimes even profits). These are usually companies that receive a lot of press due to their disruptive nature, and they often create their own markets and audiences. Typical examples include companies like Tesla, Uber, Square, PayPal.

However, growth investing shouldn’t be approached or seen as speculation, although many inexperienced investors sometimes do precisely that (see meme-investing below). Behind every growth thesis, there needs to be a sound business logic and value proposition. If a company, whose stock is floated on the stock exchange, is offering a compelling narrative about the future with a product that only exists in the secret video “renderings” of the CEO, then you can rest assured that the stock itself *is* the product.

While value investing is all about being able to price the businesses right now, growth investing is about pricing the future, connecting the dots and then tracing them backwards to the current moment in time. This requires a degree of lateral (creative) thinking, the ability to see around corners and identify patterns and trends, as well as, being able to correctly assign probabilities behind your investment thesis. 

Valuing growth companies is more of an art form than it is an exact science. However, if you are a working professional in a particular industry, you might well be positioned to identify growth opportunities within your own area of expertise. Just look for fast-growing companies that are disrupting the legacy incumbents in your market, even if it’s a niche one. Remember, to make money on the stock market you don’t have to be right all the time. You only need to be right a few times in life. Invest in what you know and understand, and when you do, don’t be afraid to really make that investment count. 

Momentum investing

If value investors hunt for bargains, and growth investors hunt for potential, then momentum investors try to ride the waves. They fish for stocks experiencing a strong uptrend, mostly using signals from technical indicators such as 50-day and 200-day moving averages (the 50D line crossing above the 200D line usually signals a “buy”, and the same line crossing back below the 200D line signals a “sell”). It’s important to note that these indicators are not scientific laws but rather they are a heuristic, a rule-of-the-thumb, a statistical likelihood.

Momentum investing sounds almost too good to be true – just invest in stuff that has the strongest “traction” and then sell when the trend starts to fall apart. While this is a perfectly legitimate way to make money in the market (and there are many specialised funds out there that offer exposure to momentum stocks) this strategy is a stark departure from the basic economic relationship between value and price. If your primary motivation to invest is to get that adrenaline pumping so it can shower you with feel-good hormones, this strategy is a good candidate to offer that. However, due to this essentially being a market timing strategy, unless you’re an experienced chart reader and technical analysis guru, you might find yourself left back as the only person on the bandwagon long after the party has finished. And that can be a very lonely and painful situation.

Income investing

Value investors, growth investors and momentum investors have one thing in common – they seek to beat the market and accomplish above-average returns. They care more about aggressively growing their capital than they do about having cash at hand. In contrast to them, however, income investors are almost exclusively focused on investing as a way to generate reliable income, either through dividends or other interest-yielding assets.

This strategy perhaps mostly resembles that of value investing, because it appeals to those who have an affinity for lower risks, and yet possess the patience & stamina to build their wealth over the long run. Income investors often choose to invest in well capitalised companies that pay hefty dividends, are often leaders in their respective industries, and are generally too big to grow quickly (or at all). 

There is a sub-category of income investors, called growth dividend investors, who try to identify growth stocks within the scope of dividend-paying companies. However, this also begets a reasonable command of reading and understanding balance sheets and many other fundamental indicators.

In addition to stocks, there are other assets such as bonds, exchange-traded funds (ETFs), mutual funds, and real estate investment trusts (REITs) that reward holders with cash. For more experienced investors with an interest in blockchain technologies, you may want to look into various stacking opportunities which allow you to deposit your crypto and earn interest in return.

Depending on where you are in life, whether you have just embarked on the investment journey or are already planning for retirement, you may consider dedicating a portion of your portfolio to income investing. This is a powerful wealth-building strategy that accelerates with time due to the potential of compounding (especially if you reinvest the dividends). It will both decrease the volatility and somewhat de-risk your portfolio, while rewarding you with a steady cash flow that you can then choose to reinvest back into the portfolio (which I’d recommend) or use it to finally get that Tesla you’ve been eyeing for a while now.

Impact investing

Impact investing is becoming an increasingly popular strategy, especially among the GenZ & millennial generations, for its potential to positively contribute to the world at large. While the previous century was all about maximising efficiency and productivity, which often came at the expense of environmental and social concerns, the 21st century seems to be all about maximising impact and ensuring that the wealth we’re creating actually continues to have a planet to be spent in.

eToro has been at the forefront of this kind of investing through its Smart Portfolios, where investors can invest in baskets of impactful companies, such as green renewable energy companies, companies working to cure cancer & diabetes, pet care companies, medicine & vaccination companies and many others. This strategy has surprisingly done well over the years, not just in terms of excellent returns, but it has also created a form of pressure for other businesses to adopt new policies in order to become more compliant with the basic principles of social responsibility. This trend is likely to continue (and even accelerate) into the future, as more and more people with a special interest in responsible investing join the markets.

Meme investing

There has recently been an emerging approach to investing which I’m taking the liberty of arbitrarily labelling as meme investing. It has been popularised by the recent democratisation of investing and the resurgence of retail investors on various (online) platforms across the globe. This, of course, is not a broadly recognised investment strategy in the traditional sense of the word, and certainly not one that I would recommend as a Popular Investor, but it’s worth briefly mentioning it because I believe it has its own place in the investment playbook of 21st century markets. 

Meme stocks are basically a subcategory of momentum stocks, whose bandwagon effect is further amplified by popular (social) media figures (influencers and celebrities) who often endorse various assets to their respective audiences. This creates a super-hyped environment which starts with a small audience of early adopters, only to then quickly escalate (due to network effects) and capture the interest of a wider audience (even outside the investment community). The “outsiders” then start to jump on the bandwagon out of FOMO (fear of missing out), creating a sort of avalanche effect that props the prices higher and higher, until eventually the whole thing runs out of buyers and crashes like waves on a rock. These companies/assets usually experience an uncertain outlook, but they embody certain attributes that resonate with the broader audiences, creating in the process a sense of community and tribe around an emotionally- and ideologically-charged narrative.

This is an extremely high-risk / high-reward investment strategy, and I wouldn’t recommend it to beginners, despite its fun and glamorous appeal. However, for the more experienced investors, it can be a viable way to achieve multiple returns by risking only a reasonable percentage of capital. 

Bottom line

Books can be written and PhDs can be researched on numerous types of investment strategies, with their many definitions and abundant evidence for why one is better than the other. In the end, it is about choosing what’s right for you in relation to your investment goals. As an investor, and especially an eToro Popular Investor, I put in extreme effort to avoid identifying strongly with any of these strategies because that can result in forming a sort of tunnel vision – which is precisely what you don’t want if you’re looking to have an edge in the markets. 

Investors that fall into the trap of identifying as “I’m a value investor” or “I’m a momentum trader” risk limiting their potential space of ideas and actions. This, in return, can cause them to miss out on capitalising on obvious market opportunities. The fact that I personally made +1000% (10x) on my GME, TSLA, NIO or ETH trades (each) doesn’t make me any less of a value investor, which I consider to be my main strategy. Nor does it make me a frequent momentum trader, just because I sometimes recognise and take advantage of market opportunities. A screwdriver is a great tool to fix a bicycle, but an extremely poor tool to eat noodles. Similarly, these strategies are tools that should be taken out of the toolbox accordingly – each to best serve their intended purpose and goal.

Gasper Sopi is an eToro Popular Investor. He holds a Master’s Degree in Cognitive Systems and UX Design. Gasper has eight years of investing experience and his goal is to outperform the S&P 500 index on a yearly basis.

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