Comprehensive, research-backed explanations of every major investment philosophy — from classical value theory to modern quantitative approaches.
Each strategy below represents a distinct school of thought, with its own logic, tools, and trade-offs. Explore them all to build a rounded perspective.
Pioneered by Benjamin Graham and refined by Warren Buffett, value investing seeks to purchase securities trading below their intrinsic value — creating a "margin of safety" that protects against downside risk and positions investors for long-term appreciation.
Value investors focus on fundamental analysis: earnings power, balance sheet strength, competitive advantages, and management quality. The strategy demands patience, independent thinking, and a willingness to be contrarian when markets are irrational.
Dividend investing prioritises companies that distribute regular cash payments to shareholders. Rather than relying solely on price appreciation, dividend investors build compounding wealth through reinvested income streams and the disciplined selection of businesses with durable earnings power.
Key metrics include dividend yield, payout ratio, dividend growth rate, and free cash flow coverage. "Dividend Aristocrats" — companies with 25+ years of consecutive dividend growth — are a cornerstone of this strategy.
Growth investing targets companies expected to grow revenues and earnings significantly faster than the broader market. Investors accept higher valuations — sometimes paying substantial premiums to current earnings — in exchange for anticipated future earnings power and market share expansion.
Key analytical tools include the PEG ratio, total addressable market (TAM) analysis, revenue growth trajectory, gross margin trends, and competitive moat assessment. Risk management through position sizing and portfolio diversification is essential.
Based on the Efficient Market Hypothesis and decades of empirical data, passive investing argues that most active managers cannot consistently outperform the market net of fees. Rather than stock selection, passive investors hold broad market exposure through low-cost index funds and ETFs.
Jack Bogle's framework emphasises minimising costs, diversifying broadly, and maintaining discipline through market cycles. Factor investing (smart beta) adds systematic tilts toward value, size, momentum, profitability, and quality factors.
Momentum investing exploits the empirically documented tendency of assets that have recently outperformed to continue outperforming over intermediate horizons. It is one of the most robust anomalies documented in academic finance literature, present across asset classes and geographies.
Cross-sectional momentum (ranking assets relative to peers) and time-series momentum (trend following) are two primary forms. Risk management is critical — momentum strategies can experience sharp reversals during market stress events.
Quality investing seeks businesses with exceptional financial characteristics: high and stable returns on equity, strong profit margins, low debt levels, consistent earnings growth, and durable competitive advantages (moats). The thesis is that these businesses compound wealth reliably over long periods.
Key metrics include return on invested capital (ROIC), return on equity (ROE), gross profit margins, free cash flow conversion, and Piotroski F-Score. Quality investing bridges the gap between value and growth frameworks.
Understanding the models behind investment decisions is essential for any serious student of capital markets.
The DCF model is the cornerstone of intrinsic valuation. It states that the value of any asset is the sum of all future cash flows it will generate, discounted back to present value at an appropriate rate reflecting risk.
Value = CF₁/(1+r)¹ + CF₂/(1+r)² + ... + CFₙ/(1+r)ⁿ + Terminal Value/(1+r)ⁿ
Where CF = expected cash flow, r = discount rate (typically WACC), and n = projection period (usually 5–10 years).
DCF is famously described as "garbage in, garbage out" — the output is only as reliable as the assumptions. Practitioners often run sensitivity analyses across multiple scenarios and use DCF alongside comparable company analysis to triangulate value ranges rather than single-point estimates.
Relative valuation establishes a company's value by benchmarking it against similar publicly traded companies using standardised multiples. Unlike DCF, it reflects what the market is currently willing to pay for comparable businesses.
| Multiple | Formula | Best Used For | Key Limitation |
|---|---|---|---|
| Price-to-Earnings (P/E) | Market Price / EPS | Profitable mature companies | Distorted by accounting choices; useless for loss-making companies |
| EV/EBITDA | Enterprise Value / EBITDA | Capital-intensive industries | Ignores capex requirements and working capital changes |
| Price-to-Book (P/B) | Market Cap / Book Value | Financial sector, asset-heavy | Intangible assets often not reflected; less relevant for service companies |
| Price-to-Sales (P/S) | Market Cap / Revenue | High-growth, pre-profit companies | Ignores profitability entirely; growth companies can be permanently overvalued |
| EV/EBIT | Enterprise Value / EBIT | Capital expenditure comparisons | Affected by varying depreciation policies across companies |
Every investment strategy is shaped by the macroeconomic environment. Understand the forces that move markets.
Macroeconomic Investing