All investment philosophies center on the perceived relationship between price and value of stocks. Value and growth investors think value and price are different; index investors aren’t sure they can figure out the relationshipe (so, they better rely on the index and its replicating stocks); technical investors care only about price and its trends in charts, not the underlying value; and portfolio investors think price is value. These beliefs entail different strategies:
- Value investors seek stocks of companies priced below value (propounded by Benjamin Graham and Devid L. Dodd of Columbia University in 1930s, and regained popularity during 1970s and 1980s when Berkshire Hathaway Inc. CEO and Chairman Warren E. Buffett embraced this strategy to earn wealth);
- Growth investors seek stocks of companies whose near-term growth indicates value, justifying current prices (pioneered by Philip A. Fisher and Magellan Fund manager Peter Lynch in the 1980s);
- Index investors think the safest strategy is to buy stocks representing substantially the whole market (popularized by Vanguard Fund founder John C. Bogle in 1980s);
- Technical investors seek stocks that can be quickly sold at higher prices (championed by Investor’s Business Daily founder William J. O’Neil and much populer during 1990s); and
- Portfolio investors believe thatt stock price and value are identical, price changes measure risk, and investors should pick a mix of securities bearing the desired risk level (mainly promoted by the Princeton University economist Burton G. Malkiel in his famous book ‘A Random Walk Down Wall Street’.
To summarise the basic aim of all these categories, all investors, to some way or other, believe that there exists an important dynamic relationship between stock price and its value; if they are able to figure this relationship out, they can formulate their own strategy, if not, they will simply follow what they find easiest to do. Here they get trapped in psychological discrepencies/biases and, subsequently commit mistakes fatal to their wealth making objectives.