Core Strategies

Growth

Growth investing focuses on assets that are expected to grow at an above-average rate compared to other companies. These companies often reinvest their earnings into expansion, research and development, and other initiatives to fuel growth.

Sometimes traders mistake speculation for growth. They justify a growth position purely on the fact that the underlying entity or asset may grow quickly.

While what is actually considered a growth asset is subjective, generally growth assets demonstrate some form of financials expansion, even if at first they may be losing money.

See Identifying Growth Assets for more guidelines on how to select such assets.

Value

Value investing focuses on assets that the market is undervaluing, but for which you have a thesis that this value will be unlocked. This is the key differentiator between Value and Growth — the market is not rewarding value assets, even if they may be performing well and you believe it should.

See Identifying Value Assets for more guidelines on how to select such assets.

Income

Income investing focuses on generating income outside of price appreciation. This may include bonds and debt instruments, preferred shares, dividend paying assets and similar. But option strategies can also generate income in a completely different way, therefore we break this strategy into two sub-strategies:

1. Dividend investing which includes dividends, return of capital, interest payments etc.
2. Option trading which involves option strategies

Dividend Investing

Dividend investing is the strategy to collect and usually compound (re-invest) dividends. Over the short term dividend investing does not realize material gain, but the compounding effect over the long term against the original investment can be massive on an annualized basis. It may, however, take a decade or more to compete with a sound Growth Strategy.

Within dividend investing there are many instruments to choose from. There may be risk with dividend paying companies, such as suddenly canceling the dividend, or going bankrupt. Therefore just because it has the appearance of stability, dividend assets should still be closely watched. When company pays dividends over a long period of time, growing the dividend even slightly, they are referred to as Dividend Aristocrats.

Option Trading

Option trading is a strategy to generate income through the selling of options. Butcher’s Row has entire strategies dedicated to leveraging options, such as Rinse and Repeat.

Speculation

Speculation is what Growth is not — taking bets on what may appear as a growth opportunity, but is highly risky. Note that we’re not saying speculation is all the remaining junk — it isn’t and junk falls into uninvestible territory — but it maps to a risk level where one has to assume there’s a high likelihood of losing most or the entire investment.

Speculation has a place in any portfolio, but as we’ll see later, it should be a small proportion of the overall portfolio.

Momentum

Momentum is the observation that stocks sometimes appreciate or depreciate in price way beyond fundamental or even technical reasons, i.e. they have momentum.

We often debate whether momentum is a strategy within speculation and/or growth or one on its own. That’s because any asset can exhibit momentum characteristics, and momentum can be fleeting. Butcher’s Row treats momentum as its own strategy, however, because as we’ll explain later, assets can be reallocated to different strategies within their lifetimes in our portfolios.

Butcher’s Row accepts two subtypes of momentum strategies; both result in price appreciation or depreciation, but for different reasons:

1. Price momentum occurs when momentum is observed and fueled purely by volumes of buying or selling. This is often driven by news, sentiment, psychology, herd mentality and similar factors. It is not driven by fundamentals.

2. Earnings momentum occurs when momentum is observed and fueled by earnings reports that are significantly above or below expectations. And not just past reports, but estimates of future earnings. In fact there are all kinds of nuances here, such as the projection of increasing earnings over some time period, combined with actual earnings confirming the projections. And when there is earnings momentum, one often also observes Price Momentum. The key difference is that earnings momentum has a fundamental basis, whereas price momentum does not.

Catching momentum before it begins is often quite difficult, but joining in on momentum early and managing the position can yield massive returns.

Shorting

Shorting stock is not for everyone, and most that engage in it often fail. It is the nature of investible assets to appreciate over time, and shorting goes against that grain. Often when assets appreciate they do so quickly, versus the appreciation that is more measured. This makes shorting a difficult strategy to master. But truthfully, with secular trends supported by momentum or fundamentals (in the negative sense) entry signals are really no different than going long.

As mentioned, due to the natural forces that support price appreciation of healthy assets, asset selection is critical.

An investor can do no wrong in avoiding this strategy. But mastering it can result in large gains in bearish markets.