An investment philosophy is a set of beliefs and principles that guide an investor's decision-making process. It's not a set of laws, more a set of guidelines. Some popular investment philosophies include focusing on equities that the investor believes are underpriced, targeting stocks that are in the growth or expansion phase, and investing in securities that provide a return in interest income.
Types of Investment Philosophies
Investment philosophies should have a basis of the investor's goals, their timeline or horizon, their tolerance to experience risks of various types, and their individual capital status or needs.
- Value investing which involves seeking stocks that an investor believes are currently underpriced by the market and whose prices the investor expects will eventually rise significantly.
- Fundamentals investing, which relies on identifying companies with strong earnings prospects.
- Growth investing in which investors buy shares of companies whose products or services hold the potential to generate strong earnings growth and higher stock prices in the future.
- Socially-responsible investing, which 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.
- Technical investing which relies on the examination of past market data to uncover hallmark visual patterns in trading activity on which to base buy and sell decisions.
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 do not frequently switch between philosophies as market conditions change.
Example of an Investment Philosophy
For example, 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 investment 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.