What Is Investment Philosophy?
An investment philosophy is a set of beliefs and principles that guide an investor's decision-making process. It is not a narrow set of rules or laws, but more a set of guidelines and strategies that take into account one's goals, risk tolerance, time horizon, and expectations. As such, investment philosophy often goes hand-in-hand with a compatible investing style.
Popular investment philosophies include value investing, focusing on shares that the investor believes are fundamentally underpriced; growth investing, which targets companies that are in a growth or expansion phase; and investing in securities that provide a return in interest income. Technical analysis and fundamental analysis are another pair of investment philosophies.
- An investment philosophy is one's approach to markets based on a set of principles, beliefs, or experiences that drive trading and portfolio decisions.
- Value and growth investing are two widely-used, as well as contrasting, investment philosophies.
- Many famous investors are known for their trademark investment philosophy.
Types of Investment Philosophies
Investment philosophies should have an understanding of the investor's goals, their timeline or horizon, their tolerance to experience risks of various types, and their individual capital status or needs. Following are common investment philosophies:
- Value investing involves buying stocks that an investor believes are underpriced on the expectation they will rise significantly.
- Fundamental analysis relies on identifying companies with strong earnings prospects.
- Growth investing is where investors buy shares of newer companies that are generating above-average sales and earnings growth, in hopes of rising stock prices.
- Socially responsible investing (SRI), focuses on investing in companies whose practices align with an investor's values as they pertain to the company's impact on society and the environment. SRI is sometimes known as ESG investing.
- Technical analysis relies on the examination of past market data to uncover hallmark visual patterns in trading activity on which to base buy and sell decisions.
- Contrarian investing, as the name implies, goes in the opposite direction of the crowd. Swimming against the current, these investors assume the market is usually wrong at both its extreme lows and highs, selling into rallies and buying when markets tumble.
Investment philosophies are one of the defining characteristics of people or firms that manage money. Most investors who achieve long-term success develop and refine their investment philosophies over time and don't abandon it as market conditions change.
Examples of Investment Philosophy
Warren Buffett and Value Investing
Warren Buffett has practiced a value investment philosophy since studying under legendary value investor Benjamin Graham at Columbia University in the early 1950s. Similarly, proponents of socially responsible investing are likely to remain steadfast in their avoidance of companies whose activities they disfavor—such as firearms production or gambling—even when fundamentals or technical factors are favoring those companies' stocks.
George Soros and Momentum Investing
George Soros is a well-known short-term speculator. He often makes massive, highly-leveraged bets on the direction of the financial markets. His hedge fund, the Quantum Fund, is known for its global macro strategy, a philosophy centered around making large, one-way bets on the movements of currency rates, commodity prices, stocks, bonds, derivatives, and other assets based on macroeconomic analysis. George Soros is unique among highly successful investors in admitting that instinct plays a large role in his investment decisions.
John Paulson and Contrarian Investing
Hedge fund manager John Paulson reached fame during the credit crisis for a spectacular bet against the U.S. housing market. This timely bet made his firm, Paulson & Co., an estimated $15 billion during the crisis. He quickly switched gears in 2009 as markets were selling off hard to bet on a subsequent recovery and established a multi-billion dollar position in Bank of America (BAC) as well as an approximately two million share position in Goldman Sachs. He also bet big on gold at the time and invested heavily in Citigroup (C), JP Morgan Chase (JPM), and a handful of other financial institutions.