Investments: Analysis and Management, 12th Edition

chapter 11

Common Stocks: Analysis and Strategy

Given your new $1 million portfolio, you will need to manage it. You recognize that the market has a substantial impact on individual stocks and portfolios, and therefore you realize you need to better understand the impact of the overall market on individual stocks and on portfolios. You must manage your portfolio on an ongoing basis, and that requires that you think about what approaches and strategies you may wish to follow.

One of the most important decisions each investor must make is whether to take an active approach or a passive approach to investing. Can it be true, as some argue, that a passive approach will reduce investor costs and produce as good or better results as an active approach most of the time? Such an approach will relieve you of a lot of the work of managing a portfolio, but it could also leave you with average results and little hope of doing better. Or, if you choose an active approach, should you try to select stocks or try to time the market? These issues will be covered here.

Chapter 10 discussed the valuation of stocks based on procedures used by investors. Chapter 11 covers the analysis and strategy for selecting and managing common stocks. Common stock investors need to carefully consider whether they will follow an active approach, a passive approach, or a combination of the two. Using a passive approach, investors can follow a buy-and-hold strategy, or buy index funds that mimic some market index. ...