I recently had the pleasure of speaking with my good friend who recently who joined a startup research team developing software that hedge funds then use to create models. Since most of the people I interact with on a regular basis don’t find talking economics to be riveting conversation, I have asked my friend to talk with me and impart some of his knowledge from working in the industry. He said there are two main things to know about for beginning investors, the first is tools and the second is strategy. Once I have done more research I plan to post on some of the tools, but for now I will share with you the bits of wisdom he gave me on strategy (this long term strategy to beat the S&P index fund which typically does about 7% when adjusted for inflation).
- Small market caps almost always outperform large market cap companies. So when given the choice invest in smaller companies.
- Cheap to book value tend to perform high to book value. That is often times boring companies will outperform the fancy ones. For example, you know Google is a great company, but their stock is a bit expensive for their book value.
- Stocks tend to follow their 6 month momentum. If you want to consider a stock look at the trend 6 months back. Whatever that trend was, the stock is likely to follow along the same trajectory (so if it was going up it will likely go up, and if it was going down it is like to go down).
Those were his tips and it certainly gave me some things to consider. I am off to do more research 🙂