Strategies for Investing in Stocks

Investment and Portfolio Management – BAF106Investment and Portfolio Management – BAF106

Session 5November 23, 2012

FORMATION OF STOCK PORTFOLIOS


Strategies for investing in stocks

The three main types of strategies than investing in stocks:

1. Sector rotation and business cycle strategy;

2. Market timing strategy;

3. Value screening strategy.



Sector rotation and business cycle strategy

The essentiality of this strategy: Each economic sector as potential investment object has the specific patterns

of market prices which depend upon the phase of the economic (business) cycle.

Sector rotation and business cycle strategy intends the movement of invested funds from one sector to the other depending on the changes in the economic (business) conditions.

This strategy use the classification of all stocks traded in the market on the bases of their behavior in regard to business cycle.

The following groups are identified: - Defensive stocks - Interest-sensitive stocks - Consumer durables - Capital goods



Defensive stocks - these stocks are usually related with food industry, retail, tobacco, beverages industries, pharmaceuticals and other suppliers of the necessity goods and services. The prices of these stocks reach their highest levels in the later phases of business cycle.

Interest-sensitive stocks - are related with the sectors of communications, utilities, housing industry, also with the insurance and other financial institutions. The behavior of these stocks is most unfavorable for the investor in the phase of economic crises/ recession. These stocks are considered as a good investment in the early phases of business cycle, i.e. in the optimistic phase.



Consumer durables are related with automobile, domestic electric appliances, furniture industries, and luxury goods and also with the wholesale. These stocks are a good investment in the middle of business cycle.

Capital goods are related with industries producing machinery, plant, office equipment, computers and other electronic instruments. Because of the remarkable time gap between the orders of this production and the terms of their realization, these stocks demonstrate their high and stabile prices in the latest phases of business cycle.

Thus by knowing and identifying the different patterns of prices relating to the industries in the real investment environment the investor can diversify his / her stock portfolio which will reflect to the changes in the economic (business) cycle



Market timing strategy

The essentiality of this strategy: The investors endeavor to be „in-the-market“ when market is in a „bullish“ phase, i.e., when prices are growing, and to withdraw from the market in the „bearish“ phase, i.e., when prices are slumping.

Investors use several different techniques for forecasting the major ups and

downs in the market.

The most often applied techniques using market timing strategies:

- Technical analysis; - Stock valuation analysis - Analysis of economic forecasting



Technical analysis - is based on the diagrams of price fluctuations in the market, the investors continuously watch the stocks which prices are growing and which falling as they signalize about the presumable changes in the stock market .

The purpose of the stock valuation analysis is to examine whether the stock market is a supply market, or is it a demand market. If the under valuated stocks prevail in the market it reflects to supply market and vice versa – if the over valuated stocks prevail, it reflects to demand market

The valuation tools frequently used when applying for market timing strategy are:

1) Price/Earnings ratio (PER);2) The average market price/ book value ratio;3) The average dividend income



Analysis of economic forecasting. Investors by forecasting changes in the macro economy and in interest rates endeavor to decrease the investment in stocks in the phases of economic downturn and to return to these investments during upturn phases of the economy .

Strategies for Investing in Stocks

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