Understanding investment styles: there is a wide range of techniques or approaches for picking investment winners

Different investors have varying investment styles. For instance, you might have heard terms like `value investor,' and `growth investor.' You need to know what these terms especially mean, if you are a mutual fund investor. Like individual investors, mutual fund investors have specific styles. Here is a guide to understanding investment styles:

Value investors believe that some stocks are undervalued relative to their actual worth. These investors will hold these stocks until others realize their actual value. There are many famous value investors, including John Templeton, John Neff and Warren Buffett.

Momentum investors are the opposite of value investors. While value investors get in on an investment long before others are aware of its value, momentum investors wait until a large number of investors have discovered its value and have pushed its price up. Momentum investors will get on, hoping to make money within a short time on the upward momentum of the sector. Currently, investors who buy and sell Internet stocks for quick profits can be considered practitioners of momentum investing.

Growth investors believe that certain stocks are likely to grow faster than the market (or some other benchmark). These investors specifically look for conditions that will cause some stocks to move faster in a relatively short period of time.

Top down investors examine the overall economy and other variables that will cause some industries or sectors to appreciate much faster than others and then invest in these sectors.

Bottom up investors begin at the opposite end of the spectrum. They are not particularly concerned with predicting which sector will outperform. Rather, they examine how sound a given company is depending on the way the business is run and its financial condition. Bottom up investors believe well-managed and profitable businesses will do well in the long run.

Which is the best style? There is no answer to this question. Different styles work differently: Value investing may require patience, momentum investing can be very volatile and so on. So, if you are a mutual fund investor, you should be careful to pick a fund that is in line with your thinking. Even if you don't have a specific style, you should be comfortable with the mutual fund manager's strategy.

A Guide to Investment Styles

Style                 What it means

Value investing       Investing in undervalued stocks; holding
                        for the long term
Momentum investing    Trading in stocks that are currently in
                        favour
Growth Investing      Investing in stocks that are likely to
                        grow faster
Top down investing    Investing in industries/sectors favoured
                        by current conditions
Bottom up investing   Investing in financially sound companies

irrespective of sectors