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There is a popular theory of investing called the random walk theory, also known as the dart board theory. It says that a stock's performance is totally unpredictable, because efficient markets guarantee that new information is immediately reflected in its share price. As a result, investors choosing stocks totally at random can do just as well as an analyst's recommendations over the long haul. The random walk theory is like driving while wearing a blindfold and we for sure feel that it is not be recommended.

However, there are other time tested strategies, which investors world over follow to achieve their investment aims. Just as there are different types of stocks and stock performance, investors and the strategies they use vary as well. There are the patient investors who pick their stocks and stick with them for the long haul, come what may. At the other end of the stock investing spectrum, there are the adrenaline junkies who try to buy and sell just ahead of the daily fluctuations of the manic market. Some strategies work sometime and some work another time. So, it really pays to know what strategy you as an investor can follow at various times.

The old buy and hold strategy is by far the most popular for amateur investors saving for goals on the distant horizon, like college, retirement, or eventual financial freedom. One of the primary reasons that investors like this strategy is because it's the most inexpensive way to participate in the stock market. Retail investors have to pay commissions and fees for every stock trade they make. Trading costs can add up, outweighing any profit made from price appreciation or dividends. This is especially true for overly stimulated investors who buy and sell several times a day, losing money at least as often as they gain. Investment advisers often recommend that individual investors adopt a buy-and-hold strategy and ignore daily swings in the market-and for good reason. But remember the ultimate success of buy and hold depends on what stocks you pick, as well as the long-term stock market trend. Picking a dud and holding it until it's six feet under is an easy way to loose a bundle. Investors starting a buy-and-hold strategy should look for shares of companies that have a high degree of financial strength (including good profit margins and steady earnings growth), are industry leaders or pacesetters in product sales and development, and are taking steps to improve their current market share and ensure long-terms growth.

Another popular investment strategy is cost averaging. This involves investing a fixed sum in stocks at regular intervals, like Rs 1000 every month. That means you'll buy more shares when the stock price is low and fewer when the price is high. Historically, the stock market has tended to go down a bit more often than it goes up, with increases coming in bigger spikes. So, generally speaking, investors have more opportunities to buy shares when they're undervalued than when they're overvalued. This strategy also helps even out the peaks and troughs of the market and if you believe in the scrip then stay with it through the ups and downs.

The "replicate the top ten" is another interesting strategy to follow. In this the investor should identify 10 companies with the highest dividend yields among the 30 companies that make up the Sensex. The strategy is simple: After the stock market closes on the last day of the year, identify these and invest an equal amount in each of them, and hold onto the investment for one year. Repeat these steps each and every year. Investors can also follow a similar strategy, by identifying the flying five and the penultimate five, i.e. the five lowest priced scrips of the Sensex and invest in them.

Among the riskier investment strategies is short selling, or "shorting" stocks. This is a method of gambling on a stock whose price you think will decline, instead of purchasing stock that you expect will go up. You borrow shares -- also called buying on margin -- from your stockbroker. You then sell them immediately and wait for the price to go down. Next, you buy them at the lower price -- you hope -- and return the shares to the broker. The advantage of shorting stocks is that you can make a profit without an initial cash investment. It's infinitely riskier than simply buying stocks because the price could go way up, leaving the short seller with huge losses.

Contrarian investing is a strategy that goes against the grain. No, contrarian investors don't buy high, sell low. Instead they ignore current market trends and buy neglected or downtrodden stocks of well-managed companies -- value stocks. Contrarians often look for good companies in unpopular industries as well. Again, the rules of smart stock shopping apply. Low prices should never be the sole determinant in an investment decision. Rather, the company's balance sheet, market position and management structure should be considered.

Many large successful investors and mutual funds are known by their investment strategy and perhaps it is not a bad idea to sit with your portfolio and just see why you had invested in those stocks-that will definitely throw light on your investment strategy as well as reveal to you that which one worked best for you and why!  

Aru Srivastava

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