This document discusses passive and active investment strategies for common stocks. The passive strategy believes market prices reflect intrinsic value and aims to minimize costs. It uses buy-and-hold and index funds. The active strategy assumes some advantage in identifying superior stocks. It uses fundamental analysis including economy, industry, and company analysis to select undervalued stocks and sector rotations. Technical analysis also informs momentum strategies by analyzing price movements and volumes.

1. Common Stocks: Analysis
and Strategy
• Strategies for investing in stocks:
Passive strategy
Active strategy
• Concepts and strategy differences

2. PASSIVE STRATEGY
• Investors who use passive strategies believe that the market price
that occurs is that price reflect the intrinsic value of these shares.
• Natural outcome of a belief in efficient markets
• No active strategy should be able to beat the market on a risk adjusted basis
• Emphasis is on minimizing transaction costs and time spent in
managing the portfolio
• Expected benefits from active trading or analysis less than the costs

3. • The strategy used in the passive portfolio strategy stock includes:
1. Buy-and-hold strategy.
In this strategy the investor buys a certain amount stock and keep holding it for some time
with a composition consisting of many shares or only a few types stock.
2. Index funds
• Strategies follow this index in practice can be described as a purchase mutual fund
instruments or pension funds by investor.
• The investor hopes that the investment performance on a collection of shares in the
instrument mutual funds are already a duplication of market index performance.

4. ACTIVE STRATEGY
• Assumes the investor possesses some advantage relative to other market
participants
• Most investors favor this approach despite evidence about efficient
markets
• Identification of individual stocks as offering superior return-risk tradeoff
• Selections part of a diversified portfolio
• Majority of investment advice geared to selection of stocks (Value Line
Investment Survey)
• Security analyst’s job is to forecast stock returns
• Estimates provided by analysts (expected change in earnings per share, expected
return on equity, and industry outlook)
• Recommendations: Buy, Hold, or Sell

5. ACTIVE STRATEGY
• Three strategies that are usually used by investors in carrying out an
active portfolio strategy stock:
1. Stock selection.
2. Sector rotation.
3. Price momentum strategy.

6. ACTIVE STRATEGY
1. Stock Selection
• Investors actively conduct analysis and selection the best stocks are shares that give
the best risk-return relationship compared other alternative.
• Investors will buy shares whose intrinsic value is over market price (undervalued) and
sell stocks whose intrinsic value is below the price market (overvalued).
2. Sector Rotation
• This strategy is usually carried out by investors who investing in domestic shares only.
• In this case the investor can do two ways:
 Invest in company shares engaged in certain sectors.
 Make modifications or changes to weights portfolio of shares in the industrial sector different.

7. ACTIVE STRATEGY
3. Price Momentum Strategy
• This strategy is based on the fact that at certain times the stock market price
will be reflecting earnings movements or company growth.
• Various techniques for finding momentum right:
1. Make a map (chart) of stock price movements.
2. Use a computer to determine the time the most appropriate for buying or selling
stock.

8. Approaches to Stock Selection
1. Technical analysis
2. Fundamental Analysis
3. Economy/Market Analysis
4. Industry Analysis
5. Company Analysis

9. Technical analysis
• Refers to the method of forecasting changes in security prices
• Prices assumed to move in trends that persist
• Changes in trends result from changes in supply and demand conditions
• Old strategy that can be traced back to the late nineteenth century.
• Not concerned with the underlying economic variables that affect a
company or the market
- The causes for the demand and supply conditions are not important
• Technicians use graphs and charts of price changes, volume of trading over
time, and other indicators

10. Fundamental Analysis
• Assumes that any security (and the market as a whole) has an intrinsic value as
estimated by an investor
• Intrinsic value compared to the current market price of the security
• Profits made by acting before the market consensus reflects the correct
information
• Classic common stock selection strategies involve growth stocks and value stocks
• Growth stocks carry investor expectations of above-average future growth in earnings and
above-average valuations as a result of high price/earnings ratio
• Value stocks feature cheap assets and strong balance sheets
• Framework for Fundamental Analysis (Top-down approach)
• First, analyze the overall economy and conditions in security markets
• Second, analyze the industry within which a particular company operates
• Finally, analyze the company, which involves the factors affecting the valuation models

11. Economy/Market Analysis
• Assess the state of the economy and the outlook for variables such as
corporate profits and interest rates.
• The status of economic activity has a major impact on overall stock
prices
• Investors cannot go against market trends
• If markets move strongly, most stocks are carried along

12. Industry Analysis
• An industry factor is the second component, after overall market
movements, affecting the variability of stock returns
• The degree of response to market movements can vary significantly across
industries
• The business cycle affects industries differently

13. Company Analysis
• Security analysts typically assigned specific industries but reports deal
with individual companies
• Close relationship between earnings per share and share prices
• Dividends are closely tied to earnings, but not necessarily the current
earnings
• Earnings are key to fundamental analysis