Investing is often categorised into two fundamental styles: Value versus Growth.
When it comes to value investing, the investment strategy is based on the idea of “buying low, selling high” by picking stocks that appear to be trading for less than their intrinsic or book value. For growth investors, they typically invest in growth stocks – which is usually defined as young or smaller companies positioned to expand and increase their profitability potential in the future.
Hence, the key difference between value and growth stocks is that value stocks are companies that investors believe to be undervalued by the market, and growth stocks are companies that investors think will likely deliver better-than-average returns.
What To Do if You are A Value Investor:
Study The Company’s Fundamentals
A style of investing championed by Benjamin Graham in the early part of the 20th century, it is little wonder that his book “The Intelligent Investor” – published in 1949 – is still popular today. In fact, one of Graham’s most famous disciples is the Oracle of Omaha himself – Warren Buffett.
If there is one thing that all value investors can agree on, it is that investors should “buy businesses, not stocks”. This means ignoring trends in stock prices and tuning out the market noise. Instead, savvy and informed investors should be looking at the long-term fundamentals of the company, such as the P/E Ratio, Free Cash Flow and Debt-to-Equity Ratio.
What To Do if You Are A Growth Investor:
Evaluate A Company’s Potential for Growth
Growth investors will look at a company’s potential for growth. There is no set formula to measure this and it will require a certain level of personal interpretation, based on objective and subjective factors.
Growth investors may use certain methods or criteria as a framework for their analysis, but these methods must be applied with a company’s particular situation in mind. In general, these five key factors should be carefully considered when selecting companies with potential capital appreciation: Historical Earnings Growth; Forward Earnings Growth; Profit Margins; Return on Equity (ROE); and Stock Performance.
Very often, value and growth investing styles are pitted against each other. Contrary to this, they could both have a place in your investment portfolio and increase the extent of diversification in your asset allocation. It’s all about finding the right mix – speak with me today to find out how.