Growth Investing vs. Value Investing
When it comes to investing in stocks, there are two major styles of investing: growth investing and value investing. There has been an intense debate as to which investment style yields the best returns and what style of investing suits investors. Let us first understand the two styles and then compare the two approaches.
Growth investors subscribe to the theory that markets are efficient and the price of the stock has all the performance parameters of the company factored in.
Hence, growth stocks appear to be “fully priced” and trade at fair to high valuations. Investors in these stocks believe that these companies operate in a high growth market and deliver consistent growth year after year and therefore the premium paid for these stocks is justified.
Examples of growth stocks include Google, Amazon and Apple.
When you follow the growth investing philosophy, you should be prepared for negative and positive surprises about the company’s performance. The investment gains come from better than expected performance.
For growth stocks to continuously outperform the markets, the underlying fundamentals should continuously beat market expectations. Very few companies can manage to sustain this kind of performance over prolonged periods of time.
In mature markets, it is very difficult to sustain prolonged periods of growth as there would be intense competitor activity, lowering of entry barriers, etc.
Value investors rely heavily on fundamental analysis and try to spot stocks that are trading at a discount to their “inherent” value.
The mispricing can be on account of temporary blips in these companies’ operating environment, or because some of these stocks are not yet “discovered”. Value investors tend to pick up stocks when they are “mispriced” and ride the upside.
Bear market phases offer excellent opportunities for value investors.
A well-known proponent of value investing in modern day times is the legendary investor Warren Buffet. He believes in buying great franchises at good prices and holding on to them forever.
When you follow the value investing approach, you should build in an adequate safety margin and must try and analyze why other investors have passed over the opportunity. If a stock is trading at a very significant discount to “inherent” value, there could be reasons that are not so apparent and therefore would need further due diligence before taking the plunge to buy the stock.
The success to value investing is determined by two price points – the purchase price and sale price. Identifying the right sale price is important – once a stock achieves the realistic/right price, it is recommended to exit.
If you are willing to be patient, be invested over a long period of time and are absolutely convinced about the business of a company, you can adopt the value investing approach. And buy stocks that you believe are available at a discount to their fair market value.
If you are comfortable paying a premium for the consistent future growth potential of a company, you can adopt the growth style of investing. Ultimately, your risk tolerance and risk taking ability will be a key factor to what approach you take.
Author Bio: Christopher is a passionate finance writer who owns a finance blog of his own and keeps on contributing informative posts on it. He also proactively participates in contributing his largely informative posts on other blogs. Christopher is a down to earth guy who believes in ‘live and let live’ statement.
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