Post #3 What is your investing style? Value vs Growth

In investing, there are multiple paths to get to the top. Great investors like Warren Buffett, Peter Lynch, Benjamin Graham all had very different investing styles; yet they were able to achieve phenomenal results. As an investor, the trick is to figure out which style suits you the best and follow that style, understand that style, experiment with that style and eventually deeply inculcate the same style. 

Two such popular styles are Value investing and Growth investing. 

Value stocks

Value stocks are companies that are undervalued and progressing slowly but have strong underlying value. Many factors, including prevailing economic conditions, legal issues, bad press, disappointing earnings, etc., might lead to undervaluation of value stocks. 

The key characteristics of value stocks are: 

• Currently priced lower than the broader market or industry. A value investor bets that in the long term the company will bounce back from the short term setbacks and market will realise the hidden value over time.

• High dividend yield, low P/B ratio, and a low P/E ratio. High dividend yield indicates financial strength and low P/B and P/E ratios give margin of safety to the value investor.

• Long hauls. Value stocks often take time to overcome the short term difficulties and thus a value investor has to be patient. Impatient investors keep unloading such stocks creating more bargains for the long term holders.

Value investing is tough to practice in the real world as market tests the courage, confidence and patience of a value investor in the short term. Greenblatt makes this point very clear below: 

Here are three great books to read if you fancy value investing:

Growth stocks

Growth stocks are made up of businesses that have recently experienced above-average earnings growth and are anticipated to continue generating high levels of profit growth. "Emerging" growth companies are those that have the potential to achieve high earnings growth, but have not yet established a history of strong earnings growth.

Key characteristics of growth stocks are: 

• Generally priced higher than the broader market or industry. Investors are willing to pay high P/E multiples with the expectation of prices continuing to grow at faster rates.

• Low/zero dividend yield. High growth companies often prefer to reinvest earnings into the business itself for future growth rather than paying dividends.

• High risk. Due to higher valuations and greater market fluctuations during time of market volatility, growth stocks come with higher risks. One bad news and the stock can come tumbling down quickly.

Here is another set of three books if you would like to learn more about growth investing:

Which one is better?

Growth and value investing have been at odds for years, with each side using statistics to bolster its claims. According to several studies, value investment has consistently outpaced growth on a value-adjusted basis over long periods of time.

Here is a study comparing value vs growth returns over a period of four decades.

Sources: Frank Russell Company, Bloomberg

Drawing some conclusions from the figure:

• Growth stocks often have the ability to perform better when interest rates are declining and corporate earnings are growing. When the economy slows down, they can, however, also be the first to suffer consequences.

• Value stocks may do well in the early stages of an economic recovery, but they are usually more likely to trail in a long-term bull market.

Hope this helps, good bye for now, keep reading, keep learning, keep moving ahead in life!!

Disclaimer: The contents of this article are for information and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice.