Investing Basics: Value vs. Growth Investing

Value. Growth. What’s the difference?

Both words resonate with me and investors. You might want a portfolio that has both. You would be right! It’s important to have both strategies.

The terms value and growth usually refer to styles of investing in equities or stocks. Now keep in mind that growth and value equities come in different sizes too. I’ll cover the differences between small, medium and large cap in another article. First things first, let’s start with some good basic info.

What is Value Investing?
Value investors look for stocks that are out of favor or selling below their fair market value. Bargain shopping. It’s really no different that when you and I look for sales at stores or online. In this case, it’s for companies. You might wonder why these stocks are undervalued. The reasons vary. It could be anything from hard times for that industry, poor earnings or a economic downturn. Sometimes the value stock has been discounted more than it should. Revealing a great buying opportunity or value. Another way to identify a good value stock is a dividend yield that is higher than the average. A couple of famous examples of value investors are Warren Buffet and Benjamin Graham.

What is Growth Investing?
Growth investors pretty much do the opposite of value investors. Growth investors focus on stocks that will experience faster than average growth as measured by revenues, earnings, or cash flow. They aren’t concerned as much with “getting a good deal”. They feel that even though the price may be high, the companies growth will propel it higher. Growth companies also use revenue and dividends to expand the company rather than pay out to shareholders. Growth stocks typically will offer higher returns than value stocks, and will have additional risk. Peter Lynch was a very successful growth investors when he was the manager at Fidelity Magellan.

Why Investors Need Both
Before you come to any big conclusion that one strategy makes more sense than the other. Let me give you a little info as to why you need to use both growth and value in your portfolio. Let’s look at the market’s normal cycles. Usually when the market is down, growth stocks tend to lag value stocks. When the market is on the upswing, goeth has outperformed value. Value also tends to do better earlier in a bull market. Growth stocks fair better as the bull market matures and continues.

The reason you need both? You don’t know when these cycles really begin and end. If you go all in on growth or value, you will probably wind up getting burned. No one style works well in every single market cycle.

Value. Growth. Now you know the basic differences. You also know that both styles have their place in your portfolio. If you like my article, you can subscribe here for free! My virtual paper boy will throw yours in your inbox every Friday.