What’s your Religion in Investing?

If religions are our beliefs of the world, investing strategies are our beliefs of the markets.

Let us explore some of these investing religions:

Passive Investing

Passive investors believe that you cannot beat the market. Don’t bother trying. Buy index funds and hold for the long term. Most active investors cannot beat the index, not even the professionals.

Market Timing

Market timers believe that buy and hold is dead and slow. You should always get out prior to a catastrophic crash. Look short term as the markets go up and down like a roller coaster.

Modern Portfolio Theory

Modern Portfolio Theory proponents believe that majority of the investment returns come from asset allocation and not stock picking. There must be ample diversification to reduce risk and having different asset classes like stocks and bonds is necessary for a portfolio. Time in the market is more important than timing the market.

Technical Analysis

Technical analysts believe that fundamental analysis is useless because the numbers and figures cannot be trusted. There are big hands manipulating the markets and the information you need are in the stock charts.

Price Action Analysis

Some traders believe that technical indicators are too slow to be useful and reading the price action on the stock charts is a better form of technical analysis. You can identify a breakout to enter or sell before a distribution top, much earlier than other traders.

Fundamental Analysis

Fundamental analysts believe that technical analysis is witchcraft and has no basis. They scorn at market timers being short sighted. Towards the quants, they believe that not everything in this world can be explained by science and investing has an element of art.

Read: Technical Analysis vs Fundamental Analysis

Quantitative analysis

Quantitative analysts believe that both technical and fundamental analyses have no science behind them. Their methods have not been backtested or verified to work. Everything that can be tested, should be tested. And only proven models can generate success in the markets.

Global Macro

Macro investors believe that the money is made in interpreting changes in global events. Just like how George Soros made a billion by shorting the Pound in anticipating that the British couldn’t defend the peg with the European Exchange Rate Mechanism. The politicians and central bankers are more influential than ever before. Look at what the low interest rates have done!

Value Investing

Value investors believe in buying stocks at a discount, with a margin of safety. They believe that assets are always worth something in this world and the market will misprice them at some point, which makes them good undervalued buys. The market will eventually wake up its senses and offer to buy them back from you at fair prices.

Growth Investing

Growth investors believe that value is static and about the past. The returns are in the future and they believe in identifying good businesses that can continue to grow their market share, revenue, earnings, cash flow and even dividends in the future. They also must have competitive advantage to deter newcomers from taking the share away such that their growth is unimpeded.

Trend Following

Trend followers believe that it is futile to guess the directions of the markets or perform any analysis. The market is bigger than our knowledge. What matters is that you buy on an upward trend and follow until it changes directions or short a downward trending stock until it reverses. They believe stock prices have momentum and would continue in one direction for a long time.

Tech Investing

Tech investors believe that the world has changed. Now it is about buying business with fast growth after product-market fit and no earnings is fine. Book value is useless and being asset-light is the best way to scale fast. It is about investing in disruptors and revenue growth is one of the most important things.

Dividend Investing

Dividend investors believe that paper profits are nothing to be happy about. Paper profits cannot pay for living expenses but dividends can. Cold hard cash is what matters at the end of the day. Investing isn’t about beating the index or having some paper net worth to brag about.

Selling Options

Most options expire worthless so you stand a better chance of making money by selling options and not buying them. They believe that it makes sense to sell options on stocks that they want to buy. They get to keep the premium if the share price didn’t go lower. They can exercise the options and get the underlying stocks if it hits the exercise price. Why not?

Buying Options

They believe that the market is unpredictable and market crashes more often than the option model suggests. Since we buy insurance on our lives, why not buy insurance on the stock market. It is okay to lose most of the time but win big once in a while.

Stock market is a casino

Speculators believe stocks are too volatile to qualify as long term investments. It is all a lie. Everyone is after another person’s money. It is a zero-sum game. You should just go in and out fast. Make a quick buck or here. You are in it for the excitement.

There are more beliefs which I did not pen down.

The problem is that there are too many of them. New investors tend find themselves struggling to decide, and end up suffering from FOMO.

Afterall, making a choice means you have to give up everything else. And the prospect of making a wrong choice can be scary.

Why is Investing akin to Religion?

tl;dr Because investors feel strongly about their investing style.

You are not suppose to criticise someone else’s religion because they may get extremely upset.

Similarly, it isn’t a good idea to criticise someone else’s investing strategy.

I’ve listed a handful of investing religions above. Every belief comes with different objectives.

For example, a dividend investor may not be using higher returns as a yardstick, but rather is concerned about the amount of dividends he can receive to cover his living expenses.

Another example is the amount of effort required. You may want to spend a lot of time and effort to uncover hidden gems in the stock market but others are not willing to do that. Your ‘higher returns’ is something that is irrelevant to them simply because they are comfortable with lower returns in exchange for a fuss-free process.

My investing religion

I don’t believe there’s a right belief, but that’s one that is more suitable for you, based on your investment objective, level of effort, personality and risk appetite.

You don’t trade the market. You trade your belief of the market.

Make a choice and stick to it, and stop criticising others even after you become successful.