Growth and Value investing are the two major ways investors approach stock investing. While some make use of one of them, others use both, and when two methods are aimed at achieving the same goal, debates and comparisons are bound to arise.
Growth investing or value investing; is one better than the other? Can you use them both? Are there disadvantages to one that the other one complements?
These questions have bugged investors for a long time. Many have conjured convincing arguments for and against both approaches, but the battle still rages on. They deserve answers.
But first, just so that the bases are all covered, what is growth investing, similarly, what is value investing?
What Is Growth Investing?
Growth investing is a strategy in which investors recognize growth companies that are outperforming their peers in revenues, cash flows, profit, and book value.
They grow at rates that their peers struggle to keep up with. There is also an expectation that these companies would keep up with their massive yield returns for a while. When you look close enough, you will find growth companies everywhere in small, medium, and large-sectors.
Growth companies may be relatively new and without a long history of earnings, but what marks them out as growth companies is that they have been doing well in the past few years, are doing very well at the moment, and look as if their momentum would carry them further.
These prospects attract investors to them.
Pros and Cons of Growth Investing
- Growth companies have a tendency to multiply their returns quickly. They are often ahead of their peers in yields and look as though they can keep it up for a few more years.
- Growth companies are also recognized for their ability to stay afloat during unfavorable economic climates. Even when growth companies have it bad in those times, the growth of their stocks just slows down. And when it gets even worse, they may experience a little dip in their stock values. But generally, they still look as though they are having it better than other companies.
- The rate of growth these companies experience exposes their stocks to more volatility, which is something many investors like to avoid. Their stocks are extremely active and often experience wide price swings. This high volatility piles up the risk level of investing in growth companies.
- The stocks of growth companies are usually more expensive than other stocks in the market. So, investors have to be very certain that the company is worth the heavy investment they intend to place on it.
- Many growth companies don’t pay dividends to their shareholders. Instead, they reinvest the money into pushing their growth higher. So if you are looking to be a growth investor, do not expect an income from the companies.
Value investing is the approach to investing that focuses on companies whose stocks are currently priced below their actual value. Value investors see these stocks as being undervalued at the moment but that they are strong enough to regrow into their actual values, or even more, given time.
These companies usually already have a robust financial foundation with a remarkable history of success. So when they become undervalued for any reason, investors see their drop in value as the perfect time to buy their stocks and wait for them to grow.
The reasons for the dips in value stocks could vary from public perception to setbacks in operations. But ultimately, value investors do not believe that these setbacks are strong enough to halt the growth of the companies in the long run.
Pros and Cons of Value Investing
- Good deals abound in value investing. Remember that value investing is all about buying undervalued and underpriced stocks. In other words, you are buying their stocks when they are selling at a discount. If this isn’t a good deal, what is?
- Value investing is not as bared to risk as growth investing is because there is a low level of volatility. Usually, value companies are regarded as boring companies, so there aren’t usually many things that upset their prices.
- Value stocks may not yield you a huge return is a short time, but they can earn you consistent profit over time.
- Value investing avoids big risks. However, the advantage of big risk investments is that they often have massive returns. So if you stuck with value investing, you could lose out of riding on the wings of volatility and risk to gain massive returns.
- Value investing takes a lot of time before you reap bountiful rewards, and that is assuming it is eventually profitable. It is also energy-consuming, as you would have to do a crazy lot of research to be sure that the value stock was worth investing in.
- Telling which stocks are only being temporarily underpriced apart from stocks that are actually grinding to a halt could be very tricky. Even if you could tell which one was only experiencing a temporary dip, the stock may end up not yielding the returns you had expected.
Primary Differences between Value Investing and Growth Investing
If you’ve been following this article from the beginning, you might already be able to spot differences between these two approaches to investing.
However, there may be some you would have omitted or that aren’t immediately obvious to you. So how is value investing different from growth investing?
Growth investors are always on the lookout for companies that have consistently grown their profits and revenues for some years.
They always have their eyes on companies that make products that are exciting and in vogue but also ensure to know that these products would not run out of favor of the public before they make their profit.
Perfect examples of growth companies are Facebook, Google, Amazon, and Netflix. These companies rode on the growth of digital trends, which is still ongoing.
Value investors, on the other hand, have their eyes set on companies whose values fall below what they should be. Value investing deals with a lot of research as investors always want to be certain that the value company is only experiencing a dip.
Otherwise, they might end up pouring their money on a dying company. Coca Cola falls into the category of a value company. It has been around for a long time and has been consistently profitable.
While they might not yield as much as Amazon given the same period, Coca Cola has proven that it is stable enough to pull through challenges and still come out yielding profits.
It is possible for a company to take on any of these two forms during its life. After all, some value companies of today used to be growth companies a long time ago.
Growth Investing or Value Investing: Which is Better?
The better one between growth and value investing is one that you feel more comfortable doing. These are the common things that influence one’s approach to investing. This debate is almost like one that investors have when it comes to choosing between dividend stocks and bonds based on risk-adjusted returns.
This debate is almost like one that investors have when it comes to choosing between dividend stocks and bonds based on risk-adjusted returns.
While stock investing basically involves risk, some investors still have more risk appetite than others. And value investors often fall on the low-risk appetite side of the court.
This is because value investing involves a lot of research that leaves less room for risk and guesswork. They arm themselves with many years’ worth of financial documents of the company they intend to invest in.
They then burrow into these documents to see if the company is worth their investment. Growth investors, who usually have larger risk appetites, don’t do as much research.
They recognize a growing trend and the companies that are at the heart of these trends, and they invest. This is not to say, however, that growth investing is entirely guesswork. It consumes its own healthy dose of research as well.
Growth companies always tend to yield returns quickly, but many of them just as quickly run out of momentum and lose most of their value.
Profitable value companies may not return massive yields in a few years, but they guarantee a steady increase in profits over many years.
Growth and Value Investing: Using One to Complement the Other
We could sit here and keep going on about how one is better than the other. But one thing that is sure is that these two approaches to investing can complement each other.
In fact, it is good to diversify your portfolio with representatives from both approaches. This way, the advantages of one can make up for the disadvantages of the other.
For instance, if you want to quickly build up your portfolio, include some growth assets. And if you want to have a stable, less volatile asset to offset the risk of your growth assets, you may include some value assets to your portfolio. You really do not have to stick to one approach.
The debate about which is better between growth and value investing may not be needed. Especially when you could use both to maximize your profits and cut down your risks.
When you are looking to invest, make sure you do your research, irrespective of whether you are buying growth stocks or value stocks.