In this day and age, investing has become one of the main ways to ensure present and future financial security. In fact, most investors are people who want to secure a sufficient amount of wealth for them to live comfortably even in retirement.
One of the biggest decisions when starting your investment portfolio, which is your collection of financial investments (stocks, bonds, cash, commodities, etc.), is which approach you will use in your investment journey. Essentially, there are two different investment approaches you could take: growth investment and value investment.
This article will explore the main differences between the two to help you make your decision on whether you will become a value investor or a growth investor, or possibly merge the two together.
- Value Investment
Value investing is an investment approach that involves buying stocks in companies that are valued below their actual worth. Generally, these are companies that are out of favor at the moment due to issues with their public image or other things. These companies, however, usually have a good track record and only require time for their stock prices to go back up.
The value of the company is determined through a deep fundamental analysis that explores the intrinsic value of the stock. This is done through a combination of financial analysis (assessing revenue, cash flow, and profit) and assessment of the company’s business model, competitive edge, and target market.
- Growth Investment
Growth investing is an investment approach in which investors search for companies that they expect will grow much faster than others. Companies like this are usually new, such as tech start-ups, or are in rapidly growing industries.
These companies would have recorded gains that are above average in recent years and are expected to continue to do extremely well in the years to follow.
The process by which they are chosen is through analysis of the product or service they provide. The competitive advantage, as well as the business model of the company, is looked at to determine whether they will outperform their competitors over a certain period.
Factors To Consider In Choosing An Investment Approach
As you decide between the two approaches, you should take the following factors into consideration.
The type of stocks chosen is one of the main factors that define each approach.
Value investors search for stocks that are currently undervalued on the market for various reasons but that are sure to bounce back with time when investors realize their proper value. Growth investors search for stocks that show a potential for exponential growth in the near future, which usually exist in rapidly growing industries.
Where value stocks are typically undervalued, growth stocks are typically overvalued. For example, a value stock may actually be worth USD$300 even though it’s valued at USD$100. Meanwhile, a growth stock can be valued at USD$250, with the potential to be worth USD$400.
Growth stocks have higher volatility because stock prices can take a hit from any negative publicity. Or, if earnings are not as high as projected, stock prices may dip way below what you are comfortable with, and you may end up with a loss.
Whereas, with value stocks, it is more of a long-term investment. The stocks in question are already in a ‘bad place’ (hence the low price), and usually, they can only go up from there. However, it should be noted that the turnaround for these stocks takes a long time.
Growth investment generally doesn’t pay in dividends. With growth investors, it’s go big or go home. Because of the amount of risk involved, the eventual payout is quite considerable when compared to other investment approaches. This makes it ideal for investors who are willing to take big risks and who have deep pockets.
With value investment, you should expect regular dividend payouts as opposed to the big score at the end of the day. This is one of the main reasons it is favored by adverse risk investors who are content with making small gains over a long period.
As you can see, the differences between the two approaches are not as broad as you would’ve imagined. At the end of the day, both approaches have very good merit. Some investors may add both types of stock in their investment portfolio, as the two types complement each other quite well.
This type of blended fund is known as growth at a reasonable price (GARP). With this type of fund, you buy growth stock that has strong value indicators. As you are waiting for the explosive growth and payout from your growth stock, you will be receiving regular dividends from your value stock, which you can either use for personal experiences or reinvest in your portfolio.
Keeping the above information in mind, you are now equipped with the basics and are better prepared to choose between growth investment and value investment.