One of the first and most important decisions that is made by a money club is to develop a custom tailored investing strategy with which each member has an acceptable level of comfort. There are various types of strategies available. The following outlines just a few.

Fundamental Strategy

Fundamental valuation of investments, such as stocks, relies on determining the actual worth of a company rather than the worth that is recognized by the market. Those that use the fundamental strategy are working on the assumption that the market overreacts to breaking news or short term trends. The best way to find the actual worth of a company is to calculate the company’s discounted cash flow. When calculating the discounted cash flow, it is important to remember that the value of money changes over time and generally loses its value as time goes by. Therefore, investors should be careful to incorporate this factor into their projected profit margins.

Fundamental Strategy at Work

A good example of fundamental strategy paying off can be seen in an instance such as when a large company with a good history, great reputation, and quality leaders suddenly finds its shares falling in the marketplace due to a breaking news story about some of fallacy in their company’s products or a particular product line. Those that are looking at the company as a whole, rather than at the current trend, will hold onto their stock and are likely to even purchase more of the stock while it is at a discounted price. They are working on the assumption that this historically high quality company will right the ship and they will have profited by staying aboard and improving their overall shareholdings.

Trend Watching

This strategy is the opposite of fundamental valuation and is sometimes referred to as greater fool theory because in order to make a profit, there must be a fool out in the world that will buy overvalued stocks or stocks that will soon decline. Investors who choose to watch trends are ignoring the intrinsic value of a company while concentrating on the present state of a stock value. Trend watchers sell at the hint of bad news and buy at the slightest whisper that a company could hit it big the next quarter. This is a very short time frame strategy that can payoff if timing is perfect. Due to its volatility, however, money clubs are not really set up to deal with this type of investment strategy. Therefore, this strategy should only be used by money clubs that are small enough that quick decisions can be made by a handful of investors.