Value v/s Growth Investing
Growth and value investing are two fundamental approaches, or styles, that are used in stock and stock mutual fund investing. Growth investors are those who seek companies that offer strong earnings growth while value investors seek stocks that appear to be undervalued in the marketplace. Since these two styles complement each other, they help in adding diversity to a portfolio when used together. This article will provide you with an overview of Value v/s Growth Investing.
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Meaning:
Growth stocks represent companies that have demonstrated better-than-average gains in earnings in the past few years and are expected to continue delivering high levels of profit growth, although there are no guarantees. “Emerging” growth companies have the potential to achieve high earnings growth, but they have lacked a history of strong earnings growth
Value fund managers are always looking for companies that have fallen out of favor but still managed to have good fundamentals. This group may also include stocks of new companies that are yet to be recognized by investors.
Pricing of these stocks:
Growth stocks have higher prices than the broader markets. Usually, investors are willing to pay high price-to-earnings multiplied with the expectation of selling them at even higher prices as the companies continue to grow.
Value stocks are lower priced than the broader markets. The idea behind value investing is that the stocks of good companies are most likely expected to bounce back in time if and when the true value is recognized by other investors
Suitable for investors:
Growth stocks have high earnings records. While the earnings of some companies seem to be depressed during periods of slower economic improvement, growth companies potentially continue to achieve high earnings growth regardless of economic conditions, making it suitable for investors.
Value stocks are priced below similar companies in the industry. Many value investors usually believe that a majority of value stocks are created when investors’ overreact to recent company problems, such as disappointing earnings, negative publicity, or legal problems, all of which may raise doubts about the company’s long-term prospects making it a somewhat doubtful for investors to invest in.
Historical Performance:
John Dowdee, a research analyst published a report where he broke stocks down into categories that reflected both the risk and returns for growth and value stocks in the small-cap, mid-cap, and large-cap sectors, respectively. This study revealed that from July 2000 until 2013, when the study was conducted, value stocks were outperforming growth stocks on a risk-adjusted basis even though they were clearly more volatile than their growth counterparts. This case was not similar for shorter periods of time. From 2007 to 2013, growth stocks tend to post higher returns. Hence forcing the author to conclude that the study provided no real answer to whether one type of stock was truly superior to the other on a risk-adjusted basis. The winner in each scenario came down to the time period during which they were held.
Risks Involved:
Growth stocks are more volatile than the broader markets. The risk attached to buying a given growth stock is that its lofty price may fall sharply when any negative news about the company spreads in the market, particularly if earnings disappoint Wall Street.
Comparatively, value stocks carry somewhat less risk than the broader markets. However, since they take more time to turn around, value stocks are more suited to longer-term investors and also carry more risk of price fluctuation than growth stocks.
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Conclusion:
The main decision of whether to invest in growth vs. value stocks is ultimately left to an individual investor’s preference, combined with their personal risk tolerance, investment goals, and time horizon. It should be noted that during shorter periods, the performance of either growth or value depends in large part upon the point in the cycle that the market happens to be in.
Author: Nishtha Bahal
About the Author: I’m a go-getter at life with the aim to collect small bits of knowledge from every part of the world.I see the world as a playground, full of swings and slides of different colors just waiting to be enjoyed upon. I believe that opportunities can be created rather than waited for, and I thus I dedicate every step of mine in the direction of constructing never-ending posssibilites for myself.
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