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Value vs Growth Investing: Which Strategy is Better?

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Ok, so you’ve finally decided to begin investing but you haven’t decided on an investing style that matches your risk tolerance and time horizon. Decisions such as value investing versus growth investing vary from person to person based on what you are looking for out of your investment portfolio.

Value stocks tend to be companies that are undervalued in the market and have the potential to bring higher returns. Growth stocks tend to be companies that are established in the market and are thought to be able to outperform the market over a longer timeline.

The investment style best for you will be determined by your goals and timeline. Let’s dive a little deeper into what value investing and growth investing really mean.

value investing vs growth investing

Growth Stocks

Like mentioned before, a growth stock is generally known as a company that is expected to outperform the market. What does this mean? These companies tend to reinvest their earnings to continue activities such as research and development so that they can continue outperforming their competitors.

Growth stocks such as Amazon or Google’s parent company Alphabet are popular given that many of the companies are well known and familiar to investors. With this high regard also comes high expectations. Investors expect future earnings growth and if the company does not meet expectations, the value of the shares can see a rapid decline as investors take the loss and sell their holdings.

Growth companies generally have healthy financials, patents for unique products, or other unique attributes that set them apart from other companies. The profits they make get reinvested into the company to develop new products and stay competitive in the market long term.

These companies attract growth investors and create a loyal following, but have a high price-to-earnings ratio (P/E). Amazon could be classified as growth company with a high evaluation but also lots of room to grow.

Professional investors may sometimes describe growth stocks as risky, given the high P/E ratios and expectations that the company needs to execute their vision perfectly. All investing comes with a certain amount of risk and companies that seem solid can still fail, making any investment advice speculative at best.

Value Stocks

Value stocks refer to large, well established companies that for whatever reason are trading under market value. Value investors look at the current stock price of a company and compare it to the book value based on market data and valuations of other similar companies. If the share price is below the market value, they would consider it a good value stock.

Of the investment styles, many investors consider value stocks to be riskier because of the negative views on a company’s stock trading below market value.

Did the CEO embezzle money and resign due to personal circumstances? Are the company’s fundamentals not aligning with what they’re saying in press conferences? With the wealth of information available to traders, undervalued stocks are rare and usually have some sort of reason for being valued that way.

To find a value stock, scan for companies that are mature in their respective industries and look for companies that have some kind of current issue that has devalued their stock price but has promising future cash flows and growth. Many investors with a longer time horizon will invest in value stocks.

Value vs Growth Investing At a Glance 

In order to compare whether growth stocks or value stocks are better it’s important to consider the risk needed and timeline enduring that risk to achieve the profits. While value investing is risky, it’s considered less risky when compared to growth stocks.

This is because the companies that value investors look for are generally well established with a large market share, may pay dividends, and have promising future growth based on their finances, products, and services. Since their current stock price doesn’t necessarily reflect the value of the company, their stocks tend to appreciate over time.

Growth companies tend to not pay dividends and reinvest to grow the company, but the lure to prospective investors is the future results of that reinvestment reflected in the stock price. Growth investors take on a higher risk than they would if investing in value companies, but this risk is acceptable if their investment objectives are to find companies with superior gains and higher risk.

While growth stocks in theory should yield higher earnings over a long enough time frame, it is not unusual to see value stocks outperforming growth stocks. Past performance indicates that many value stocks have done better in the overall market than growth stocks.

While this is true for the last century of market analysis, more recently the growth companies have shown greater returns than traditional value sectors.

Which One Should I Invest In?

While we can’t provide investment advice on where to put your money, hopefully we can provide information that will allow you to make investment decisions that cater to your risk tolerance. If you’re looking for a long term investment style, value stocks may be the best option for you.

That being said, the last decade has seen growth stocks returns trump their value counterparts. Returns and performance of growth and value stocks will depend at which point in cycle the market is. Growth stocks tend to have higher returns when bull markets are at full swing, while value stocks outperformed growth stocks during bear markets.

One important point to remember is that a cycle doesn’t have a defined period of time. A bear market can last for years, or bounce back quickly and a bull market can burn bright for a short time before crashing, or last a decade.

Consulting an investment advisor or on whether growth vs value investing is better for your investing style is always a good bet as well. The important thing is to make your financial decisions after doing your due diligence!

 

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