This is written by @fayewang, stock market analyst at Investingnote.
Choosing an analysis method & stocks based on your own time horizon
Time is always an important factor in an investor’s trading/investing strategies. Before you start planning on investing, the first step is to decide the length of your time horizon. There are various investment periods: 1) Long-term, 2) Medium-term and 3) Short-term. This article will have greater emphasis on the long-term investment and fundamental analysis.
1. Long-term investment
From my personal opinion, a long-term investment should at least last for one year. Before any further discussion, it is essential for investors to know that market is about “expectations”. I will explain it with following examples. Firms usually announce the date of financial results release before they have the actual movement, thus people form their expectation towards the result in advance. This means that usually, the market price has already incorporated those expectations before a certain event. After the initial publicity of those financial results, whether the stock of a firm has obvious price changes truly depends on whether the results meet the expectations of shareholders.
One year should be long enough for the market to absorb unanticipated information and fully reflect it in the price, and that’s also why fundamental analysis is more meaningful for long-term investors. As a fundamental investor, I normally start my analysis with the company’s financial statements, but always bearing in mind that those documents actually reveal performance of a firm in the last financial period (year or quarter). Longer time frames give the market enough time to digest all expectations and responds after certain event or news. That also explains why price is tend to be less volatile in the long run than in the short run.
Also, for long-term investors, bluechips and defensive stocks will be the optimal choice in portfolio.
According to Barron’s Dictionary of Finance and Investment Terms, bluechips mean “nationally known company, with a long record of profit growth and dividend payment.”
According to the definition provided by Investopedia, defensive stock means ”a stock that provides a constant dividend and stable earnings regardless of the state of the overall stock market”, find the definition here.
The principle is simple: investors should keep stocks that would not be severely affected by economic fluctuations since they gonna to buy and hold for long time.
The common misconception is that all bluechips are defensive stocks. In fact, not all blue chips are but they are more likely to be more “defensive” due to considerable profit scale and favourable government policy. Additionally, bluechips have greater chance to increase their intrinsic value as time goes by. Representative of long-term investors could be Warren Buffet, who tends to hold securities for more than 5 years or even 10 years.
2. Medium-term transaction
The medium-term here may refer to the time horizon that is more than one month but less than one year. However, the boundaries of different time frames are not absolute, so medium-term here can also refer to period that is “neither too long or too short”. The categorization and conceptualization of different time horizons are simple ways that help investors figure out how long they should hold securities or other financial instruments.
Within such a time frame, people can combine both technical and fundamental analysis to make a decision. Using fundamental analysis to analyse a stock is useful because investors would not want to invest in a company with weak financials and indications of failing. Then, technical analysis can help you decide an appropriate entry time.