The Difference between Growth and Value Investing
Everyone knows that you cannot build financial freedom over the course of your life by living paycheck to paycheck. You’ve got to find ways to make your money work for you. In past generations a savings account at the bank was a viable option, but these days the interest you accrue from a basic savings account is truly laughable. CDs are a sound investment, but the returns are low and your money is locked up for a significant amount of time. Many people still consider real estate the best possible investment, but you obviously need a ton of capital to get started, and some folks don’t want to be tied to a mortgage for the next ten, twenty or thirty years. That means the stock market will always be a solid, if somewhat terrifying option. It’s the place the real money is made, as long as you know what you’re doing. And one of the fundamentals you must understand to get started on the right foot is the difference between growth and value investing. This is a fundamental separation in thinking, and until you know which side of the fence you fall on you shouldn’t invest a penny.
Value investing is a very simple strategy at its core. Basically, you want to find stocks that are currently trading for less than they are truly worth. The goal of the value investor is to find companies that are built soundly, with financial statements that show they are in good shape, but for some reason have stocks that are undervalued by the current market. This is a strategy that not only involves taking a leap of faith, but also requires tireless research.
As a value investor, you are basically saying that the current stock price doesn’t paint the whole picture. Most investors rely on a hypothesis that declares a stock’s price is the most reasonable, given all that can possibly be known about a company. But the value investor understands how bias can come into play, and will value their own judgement more highly than what the market happens to say. So the value investor will buy a stock that appears to be underpriced, and sell a stock that is priced too highly.
The growth investor acts in a completely opposite manner. Basically, this investment strategy requires you to asses the potential of a stock, and to purchase based on the largest and most positive growth trajectory. The growth investor will also research a company in great detail, and then purchase that company’s stock if he feels it will grow at a better rate than the other companies in that industry, or across the market as a whole. It’s about speed and consistency, and will also take a leap of faith at some point.
As a general rule, portfolios that lean on value investments will maintain their worth better when the market is down, while an emphasis on growth investing will serve you well in a moderate or rising market. In either case you will probably have to try it out for yourself, as either one requires you to make a judgement call that goes beyond the black and white numbers. Investing in the stock market requires resolve and no small amount of luck, and one approach won’t outperform the other if the background work isn’t done well. There are no shortcuts, so put your time in with both styles before committing to one over the other.