Trend versus value investing - and how Warren Buffet came a cropper

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There are many different types of investing styles all of which will have their advocates and enthusiasts.

For me there are only three that merit any attention. There is “value investing”. There is “small company investing”. And finally there is “trend investing”.

At Saltydog Investor we believe unashamedly in trend investing.

Provided that you have access to accurate up-to-date information, in my opinion trend investing is the only method that makes long-term sense and lends itself to the understanding of the DIY investor.

Value investing is represented very clearly and ably by its most famous advocate, Warren Buffet, one of the wealthiest men in the world.

Value investing means that you are looking for good companies that are trading in unloved sectors or are just simply overlooked and undervalued. You buy their shares cheaply and sell a long time in the future at a very much higher price - or at least that is what you hope to achieve.

There are some fund managers who specialise in this technique of value investing. To be successful, this requires much scrutiny of the company’s balance sheet, sales plans and accounts, and having done all of this it can all go horribly wrong due to totally unforeseen circumstances.

If you are going down the route of value investing it is well worth remembering the expression “Man plans and God laughs”. Warren Buffet came a cropper by buying into Tesco, and then a couple of years later being forced to write-off nearly a billion pounds. And he is an investing genius!

Small company investing is exactly what it says on the tin, i.e. you don’t invest in large companies.

The theory is that companies start small and gain value as they become larger. That is fine and dandy provided that you have selected a company to invest in that does not fall by the wayside. And be assured, there are many of them that will exit stage left never to be seen again.

Another reason this style is popular with some managers is because when a company is small it is less well researched. Price anomalies may exist, and there is a bargain to be bought by the fund manager that does this research. So at the end of the day, it turns out that this is really just another form of value investing, but with small companies as opposed to large. The evidence does seem to show that small company funds outperform large company funds if you look over a long enough period of time.

In my book, trend investing has much more logic to its approach and makes more sense.

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