Investment Theory versus Investment Behaviour

Investment Theory versus Investment Behaviour
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There are many ways to skin a cat. Investment styles and philosophies abound, but the last thing you want is to behave differently from the theory you adhere to. Here are some investment theories and their corresponding investment behaviour.

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Efficient Market

Theory: Stock prices are totally efficient and investors can only manage taxes and trading costs

Investment behaviour: Buy an index fund and avoid trading

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Semi-strong Efficient Market

Theory: Stocks are fairly priced until news arrives

Investment behaviour: Trade on news flow

Weak Efficient Market

Theory: Less structured news is not properly reflected in prices

Investment behaviour: Read trade rags, do channel checks and gossip with competitors, customers and suppliers


Theory: For short periods, stocks will keep moving in one direction

Investment behaviour: Buy stocks whose prices have risen at the fastest rate

Valuation relative to history

Theory : Stocks prices move around fair value, which is a static function of EV/EBITDA

Investment behaviour: Buy stocks at the low end of their historic EV/EBITDA band.

Intrinsic value

Theory: Stock prices move irregularly around present value, which is the sum of shifting expectations about the future

Investment behaviour: Buy stocks that are priced far below their value using assumptions you believe

Final words

Besides making sure that your investment behaviour is consistent with your investment philosophy, it is also important to keep an open mind and consider the alternatives, why they may or may not work and why they may or may not be a better fit for you.

I developed my passion for investment management especially equity research at a relatively young age. My investment journey began when I was 20, at a point in time where markets were still recovering from the Global Financial Crisis. My portfolio started from money I saved over the past years and through working during the holidays. I was fortunate to have a good friend with common investing mentality to began my journey towards value investing. To date, we still research and invest in companies together, discussing valuations and potential risks of a company. To date, I manage a fund with a value investing style. Positions are decided upon via a bottom-up approach or smart speculation (a term I came up with when buying a stock for quick profit due to a mismatch in prices in the market due to takeovers/selling of a subsidiary or associate). Apart from managing my own portfolio, I enjoy sharing my research with family and friends, seeking their opinions and views towards the stock. Reading Economics in London, I constantly keep up with the financial news in Singapore & Hong Kong. Despite my busy schedule, it has not stopped me from enjoying other aspects of life. I enjoy a variety of activities in whatever free time I may have – endurance running, marathons, traveling, fine dining, whiskey appreciation, fashion. Lastly, I enjoy meeting new people, discussing ideas and gaining new perspectives towards issues in the world.
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