First, a short introduction about the two investment styles that I know of.
Long term or Fundamental style or the Warren Buffett style investing
That is to identify and invest in companies at a fair price that have good managements, have a decent growth potential and also have the ability to fend off competition. The most famous example given of Buffett style investing was his investment in Coca-Cola. I don't know at what time he made the investment though.
The method analyses the past, present and the future of a company before investing. The past has financial data of the company and the different strategies it adopted at various times to maintain its business. The analysis might include the knowledge about the management and the strategies that the company is presently adopting to continue its business. The analysis of the future would be based on the past, present and the nature of business itself.
Let's the example of Nokia. When mobiles were first made, Nokia was one of the market leaders in the mobile telephone market. But gradually, it's market share was brought down first by other manufactures like Sony Ericsson, LG, Samsung, Motorola which also made mobiles and then recently again by Apple and Samsung which are about to destroy Nokia completely with their smartphones. Looking retrospectively, one would have wanted to invest in Nokia when it was at it's peak, but no one could have imagined its eventual destruction. Is a similar situation repeating in the case of Apple? Only time will tell. Would you bet on Apple? Analyse the financial data of the past, analyze the strategies of the present, is the management good enough after the loss of Steve Jobs and finally what do you see in it's future. Your bet should depend on all these questions.
The time scale for this kind of investing can last anywhere between a couple of years to a few decades.
The method analyses the past, present and the future of a company before investing. The past has financial data of the company and the different strategies it adopted at various times to maintain its business. The analysis might include the knowledge about the management and the strategies that the company is presently adopting to continue its business. The analysis of the future would be based on the past, present and the nature of business itself.
Let's the example of Nokia. When mobiles were first made, Nokia was one of the market leaders in the mobile telephone market. But gradually, it's market share was brought down first by other manufactures like Sony Ericsson, LG, Samsung, Motorola which also made mobiles and then recently again by Apple and Samsung which are about to destroy Nokia completely with their smartphones. Looking retrospectively, one would have wanted to invest in Nokia when it was at it's peak, but no one could have imagined its eventual destruction. Is a similar situation repeating in the case of Apple? Only time will tell. Would you bet on Apple? Analyse the financial data of the past, analyze the strategies of the present, is the management good enough after the loss of Steve Jobs and finally what do you see in it's future. Your bet should depend on all these questions.
The time scale for this kind of investing can last anywhere between a couple of years to a few decades.
Short term or Trend following or Trading style of investing
This style just follows what is happening at the moment and takes bets on the immediate consequences. You gain if your prediction about the immediate future is correct and lose if it is not.
As an example, take the case of the stand-off between USA and Iran. If USA would strike Iran, the price will immediately shoot up but if it does not and the skirmish reduces in intensity, the price of oil might either remain stable or even go down. Given the situation what would be your prediction on the price of oil. One can make money both when the price rises and falls. Let's assume that the price of oil is about 120 USD per barrel. In the first case, let's assume that the US strikes Iran and the price of oil increases to 140 USD per barrel. In the second case, let's assume that the US does not strike and the price drops to 100 USD. One can make money in both instances. In the first case, you just buy oil now and sell it later and make a profit of 20 USD. In the second case, you will borrow the oil from someone for a small rent (let's say 2 USD), sell it now and get a cash of 120 USD and when the price falls down to 100 USD you buy it back again for 100 USD and return the oil. Now, you make a profit of 18 USD (20 USD profit - 2 USD rent).
This kind of investing can last anything from a few hours to an year.
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