Which Is Better: Value Investing or Growth Investing?
The end game of stock investing is always the same, and that is to grow your wealth. However, even with the same goals in mind, there are a few different strategies that we can employ. Of the various strategies, two approaches stand out as the most popular – growth investing and value investing.
They were each made famous by investing legends of their time. Benjamin Graham is thought to be the father of value investing. He prescribed buying stocks that were sold at a discount to their tangible book value and was the person whom Warren Buffett attributed as his inspiration and mentor.
On the other hand, Fisher was a legendary investor and author of the book, Common Stocks and Uncommon Profits. He believed in buying companies that could grow its earnings. He felt that this would translate to a higher share price or better dividends in the future. These companies may be priced steeper than their counterparts, but Fisher believed that it was worth it if the company could continue to grow at pace.
So with that, let’s take a deeper dive into the differences between the two strategies.
Value investing is about finding bargains in the stock market. Like pearls in an oyster, value stocks are a scarce find, especially in current markets.
The most common way to find bargains in the stock market is looking out for companies that have been unfairly beaten down due to short-term, solvable problems.
Take bank stocks in Singapore as an example. In 2016, the oil and gas crisis led to an increase in non-performing loans in that sector. Banks with exposure to the industry suffered some losses as a result. Nervous investors responded by dumping their shares and forcing the stock prices of the banks down considerably.
However, if you were a value investor, you would probably have picked up on the fact that this poor performance of the banks was only going to be short-lived. The banks were well covered in other areas, and exposure to oil and gas just made up a small portfolio of their loans. Needless to say, the banks’ performances regained their vigour in 2017, and the share prices likewise rebounded, doubling from its low in 2016. Value investors who bought in at the correct times were rewarded for their patience and foresight.
Growth investors look for companies that are growing at a fast pace, either in their revenue, profits or cash flow. These companies are usually priced at a premium to their counterparts. However, investors are willing to pay more for companies they believe can grow over time.
A prime example in this modern era is tech stocks that have the world at their mercy. Companies like Amazon, Facebook and Alphabet are poised to continue to grow as more people gain access to the Internet, and more companies use their services to reach out to the masses.
Although these companies may have high price-to-earnings multiples attached to their stocks, it may prove value for money if the companies can fulfil their potential and grow their revenue and profits each year consistently.
The Foolish bottom line
Both investing strategies can prove useful to an investor as long as they can reap returns from their investments. It is difficult to say which is better as each has its own merits. Value investing may be less risky, especially if investors can find good bargains. However, growth investing can provide higher returns if the stocks can grow at a pace that warrant their valuation.