Are You a Growth Investor or A Value Investor?
There is a longstanding separation between growth investing and value investing. The separation may be an institutional method to create different strategies. Traditional convention says investors must choose a side before beginning to invest in any endeavor. Analysts debate whether a certain fund or stock is a growth or value position. But who really knows? What’s the difference between the two investing strategies?
Are You a Growth Investor?
Growth investing is an investment strategy that concentrates on increasing the value of an investor’s money in a short period of time. This method is focused around investing in companies that show above average revenue, earnings, or cash flow growth in comparison to its peers. A common trait shown by “growth” companies is reinvesting profits towards innovation instead of shelling out generous dividends.
The true essence behind growth investing is simply to maximize profits and realized gains. There is a different level of risk that comes into play with growth investing. Many of these companies are trying to create their own space and cement their position within their industry. As opposed to well established companies who already own their share of the market. Growth funds seek to propel beyond the overall market gains by taking on the riskier companies in hopes of obtaining the greater returns.
There are numerous ways to seek out growth investments. Growth funds include emerging markets, newly issued Initial Public Offering (IPO) stocks, and innovation blue chip companies. Investors might seek out those companies who continuously pour capital into research and development to expand their business. Companies with above average core ratios, such as price-to-sales or price-to-earnings growth (PEG) tend to lead in growth results.
Looking for the criteria that may constitute a potential growth investment is the easy part. There’s no right or wrong way to evaluate growth opportunities, and at the same time there isn’t a guaranteed method to continuous successful picks. Many investors pursue new and evolving markets that may have a strong impact on the overall economy. There is a subjective and speculative component to finding these growth investments.
Are You a Value Investor?
Value investing is an investment strategy based on investing in companies that hold stronger core valuations than its peers. Investors seek out companies that may be undervalued at the time, but have potential for steady stability. Emotional investors who act on any news report helps value investors with the opportunity to obtain these undervalued assets. This in turn provides the potential to return a profit on investment.
There can be many reasons why companies are undervalued. A common reason is a company’s earnings falling short of what analysts’ predictions are. That will oftentimes cause investors to pull back on that investment. The industry as a whole may be suffering through a periodic downturn, so overall revenue may be lacking. The present market value will be under a threshold to value investors, in relation to its future cash flow.
The value is in the consistency. These companies continue to produce steady revenue, income, and cash flow. The ones who pay out generous dividends are typically clear-cut value companies. Investors may use these financials to determine its current value in comparison to its intrinsic value. No two people are going to place the same value on the same company. However, there is less speculation in locating value than there may be in growth.
Earnings season is a target time for finding undervalued opportunities. Value investors focus on companies with lower than average growth. Typical holdings in a value portfolio may show below average valuation ratios, such as, price-to-earnings, price-to-book, debt-to-equity, or higher dividend yields. The hope for these investors is the eventual market turnaround that will create the capital gains for their portfolios.
Let’s Talk About Both
There are investment portfolios that have a mixture of both styles of assets. A good example of a mix of growth and value within the same industry is Facebook Inc. (growth) and Microsoft Corporation (value). Buying into a value company while taking on a position with a growth opportunity allows for steady value, plus consistent dividends to soften the tough times.
It’s interesting that the performance of either growth or value investing usually takes turns on which style leads in capital appreciation. In recent years, growth stocks have outshined value stocks with the likes of Amazon.com Inc., Google Inc. and Tesla Motors Inc. Apple Inc. was a long-standing proclaimed growth stock, but currently is being flagged as turning the corner towards a value position.
When it comes down to investing, the single most important result is to increase the asset’s value. Now, whether this occurs with short-term growth and profit or long-term steady capital appreciation, the gains are still realized. It is necessary to understand the type of investing style that is being executed, so the anticipation for when to sell can be forecasted.
Growth investing. Value investing. Whoever isn’t looking for both in an investment isn’t aiming for maximum success.