When we are talking about stock investment strategies, the two most well-known ones are value and growth investment. Both strategies come with its own advantages and disadvantages. Which one is the better choice? In this article I will explain the differences, the pros and cons in each strategy, so you can decide for yourself which one suits your needs better.
What is value investing?
Value investing is a strategy in which people buy stocks that are undervalued, meaning that the stock prices are lower than the true value of the company. Value investors hope for a price increase, after the market recognizes the true value of those stocks. Value investors focus on fundamental analysis, looking at metrics such as the price-to-earnings (P/E) ratio, price-to-book (P/B) ratio, and dividend yield.
Key characteristics of value investing
- Not efficient market: according to value investors, stocks can be over- or underprized, based on the performance of the economy and other factors like new innovations, product recalls or litigation.
- Don’t follow others: value investors don’t follow what most investors are doing. When investors sell, value investors often buy and when they are buying, value investors sell.
- Diligence and patience: value investing involves a lot of financial analysis and strategy that you must do for yourself. Find a method that works for you.
- Waiting: you need to wait for the right moment to buy your stocks, which can take a long time of waiting.
What is growth investing?
Growth investing means that investors buy stocks from young and small companies which can grow the investors capital, if the company becomes successful on the long run. Therefore, growth investing poses a lot of risk. Investors often buy stocks from companies that belong to rapidly growing industries, or to industries with innovating technologies.
Key characteristics of growth investing
- Future potential: growth investors invest in companies that are expected to grow rapidly in a short amount of time.
- High valuations: growth stocks often have high P/E ratios, which can mean price rise in the future.
- Reinvesting of earnings: young companies often reinvest their profits in favor of their growth, that means investors often don’t get any interest after their stocks.
- Higher risk, higher reward: growth investing carries a lot of risk, however if a small company becomes successful, investors can earn a lot of capital.
Compering value investing and growth investing
- Investment focus:
- Value investment: focuses on stable but undervalued companies.
- Growth investment: focuses more on a company’s future potential.
- Risk and reward:
- Value investing: risks are lower, because it focuses on established companies, but rewards can be also lower, and slow.
- Growth investment: carries higher risk, because it invests in young companies, but if they will be successful in the future the reward can be also bigger.
- Time horizon:
- Value investment: value investing is a long-term strategy, it involves a lot of waiting, for the prices to reach the intrinsic value.
- Growth investment: can also be long-term, but focuses more on rapid growth of companies, therefore it is often a short-term investment strategy.
- Market:
- Value investment: value stocks perform well during market instabilities.
- Growth investment: growth stocks perform better during a time investors are optimistic.
Which strategy should you choose?
To choose between these two strategies you should consider your own risk tolerance, time horizon and market outlook. If you are willing to wait for the best opportunities, and tolerate lower risk, than value investing is the way to go. If you believe in the success of young businesses and can tolerate higher risk for the greater returns, choose growth investment. However, in practice most investors blend these two strategies to create a diverse portfolio, which might be the best way of investing.
Both strategies have their advantages and disadvantages, that means both are good to some people and bad for others. If you are thinking of choosing one of these strategies for your investment, you need to consider the characteristics mentioned above and consider which one would work for you the best.