Growth investing vs Value investing
Growth investing is the philosophy of investing in companies that promise growth, i.e., increasing revenue, cash flows and profit. Such companies have a good earnings track record and an above average growth rate.
Growth investors do not expect the company to pay dividends. This is because growth is the main objective. The profit earned is reinvested for developing infrastructure, purchasing manufacturing equipment, hiring more personnel, and other such expansions. The investors buy these stocks at higher valuations in hopes of selling them at a greater valuation.
The reinvestment in business may or may not translate into profit.
The valuations are stretched.
Stock prices are sensitive to changes in the current or expected earnings.
Owing to the higher potential upside, there is greater volatility.
Best suited for:
Risk tolerant investors who do not expect dividend payments and can stay invested for a longer horizon.
Value investing is the philosophy of investing in companies that are fundamentally strong but trading below their inherent value. These companies might be relatively new companies that have not caught the attention of markets yet. Or these could be established companies that are not doing well due to a short-term event or macro-economic factors but nonetheless are fundamentally strong.
In this style of investing, there is not much emphasis on growth. So, even if the stocks don’t appreciate much in value; investors gain from the dividend payments. Value investors hope to gain profit when the market comes to realise the true value of the stock.
Falling for the value trap! If an investor does not assess the business and the reasons for the undervaluation of stocks properly, he might make a wrong choice. For example, a low PE stock does not always translate into a value stock. There could be several reasons for the undervaluation, such as the company losing its market share due to low entry barriers to competitors, the company’s poor management, sectoral slowdown, etc. Due to this, the stock price may not rise to the expected level.
Best suited for:
Investors, who look for companies with stable businesses to invest in, want an income from their investment and can stay invested for a longer horizon.
Which is better?
Both investment styles have their own advantages and a fair share of risks. However, the aim remains the same - to create wealth for the investors in the long-term. It has been observed that value stocks perform better at the start of a bullish market cycle, after which, growth stocks tend to perform better. For maximum benefit and diversification purposes, investors can incorporate both ways of investing. This way, they can get the best of both worlds.