Value and growth refer to two categories that have very different investing styles. While value growth focus on stocks they believe are undervalued by the market, growth stocks often deliver above-average returns yet it’s riskier than value stocks.
Oftentimes, people tend to debate which one is better. Some say value, while others say growth. Believe it or not, both portfolios have room for both. Instead of choosing which one is better, finding the right combination to blend both value and growth stocks will increase the chance of diversifying your portfolio.
So let’s dive in deeper together. Here’s what you need to know about each school of thought and their common misconception before deciding on which one you should get.
Growth vs Value: What are the differences?
Mainly these types of companies often focus on doubling up their revenue that makes the investors betting these types of stocks that have already demonstrated better-than-average growth (earnings, revenue, etc) and will continue to do so, making it more attractive for investment.
Growth stocks tend to have high valuations as measured by price-to-price earnings or price-to-book value ratios.
Examples of growth stocks:
Since Netflix is considered one of the competitive markets among participants, Netflix was able to grow significantly over the year.
Apple is another one of the most bombastic growth stocks over the years. Apple is known for its continuous growth rate at a very fast pace due to a very loyal consumer base.
Facebook is another growth company that’s been extremely successful for the past few years. Although Facebook suffered several issues related to data privacy issues, violation of privacy rights, and many more, they are still considered one of the most successful growth stocks with an ever-lasting growth rate.
Basically, it’s all about stocks with low prices BUT PROMISING PROSPECTS. Reasons, why these stocks may be undervalued, are due to short-term crises or depressed conditions within the industry.
Some investors prefer to buy stocks they believe are underpriced, either within a specific industry or the market more broadly, betting the price will go back up once others catch on.
Examples of value stocks:
1. Bank of America
2. JP Morgan Chase & Co
So which one is more suitable for you?
Growth and value investing offer advantageous opportunities to their shareholders. Hence, choosing the best investment style for you depends largely on your personal financial goals and investing preferences.
You’re growth investor team, if:
1. You love big stock price moves!
Growth stocks can be extremely volatile in the future. When things are better than expected, the price is aligned with your favor. However, when the price is disappointed, higher-priced growth stocks can hit you right away.
2. If you have higher tolerance of risk
As we’ve mentioned before, growth stocks tend to demonstrate better-than-average gains earnings in recent years hence it requires higher risk tolerance investors that can endure the market during depressing periods (normally it’s short-term). However, it will continue to achieve high earnings regardless of economic conditions in the long run.
3. You’re confident you can pick out winners in emerging industries
Growth stocks might take some time to realize their full potential, and they often suffer setbacks along the way. You must have a long enough time horizon to give the company a chance to grow.
You’re a value investor team, if:
1. You love the stable stock price
You are someone who is not focusing on large movements in the market. Your goal is to invest in a predictable business where the stock price volatility isn’t fluctuating.
2. You are fine with the current income in your portfolio
Some companies pay several dividends to their shareholders to make their stock look attractive in any ways. If you are someone who is keen to receive dividends, then you should look out for companies that will provide attractive dividend yields.
3. You want more immediate payoff from your investment
Value stocks are good when business is moving in the right direction - they will increase rapidly. Value investors tend to identify and buy shares of these stocks before other investors noticed.
It is applicable to own both growth and value stocks as each type have their special points instead of just choosing one of them. Some of you might have more than one investing style in which this is a good opportunity to diversify your portfolio too - “Why not both if this can give you the best of both worlds, isn’t it?”
Hence, focus on your goals for your investments. Along the way, you will gain a better understanding of whether you are more towards growth investors, value investors, or a bit of both.