Growth Vs Value Investing

This video is sponsored by Blinkist. Visit Blinkist.com. The simple bagel to get a free week plus 25 off a full year subscription. Let me guess you're a

value

investor. I'm sorry for you, son, Apple, Tesla, Amazon, you're missing out, grandpa. know

value

is dead, wait, wait, wait, don't tell me you're a

growth

investor, just another nut would buy the same thing as everyone else and believe they're going to beat the market. You couldn't find great value if we were in the grocery aisle at Walmart, that's right ladies and gentlemen, we're back with another showdown between

growth

investing

versus value

investing

and it's true that it's not as fierce as the debate between active versus passive, but it's important to understand, anyway these are then the two most popular fundamental investing approaches and you're probably actually employing one of them right now if you're actively investing through a mutual fund or ETFs, but if Although both investment styles belong to the same school of thought, they employ opposite poles. criteria for selecting investments, so let's go over growth in value investing and how they compare to simple current growth and value investing form something of a dichotomy within the fundamental school of investing.

Growth investing, on the one hand, is the fast and furious approach that has been particularly popular and successful in recent years, while value investing is the slow and steady philosophy made popular by Warren Buffett himself. The two approaches are broad in nature and can be divided into many different strategies, but generally the actions can be classified into one. Both of these approaches are based on three characteristics, the first of which is the underlying company's growth by growth. Here we refer to how quickly a company's revenue, profits or cash flows increase annually and when it comes to growth investment.

This is the main focus, naturally, it is seen that growth investors are trying to invest in those companies that are growing faster than the market in a bid to earn above average returns. It's about finding the next big thing, that new technological application or innovative product that's taking off. and has the potential to dominate the market, making it particularly attractive to beginners trying their hand at stock picking. Generally, the investor will select companies that have experienced at least a couple of years of rapid expansion, often something above 20 percent due to this requirement. They tend to be smaller and younger, as it can be difficult to achieve these higher growth rates when you are already larger or more mature, but this is not a requirement for growth investing today, there are a number of larger giants. mature like Microsoft and Amazon. that continue to grow rapidly, so it is common to find these two companies labeled as growth investments despite their enormous size, now worth investing in, on the other hand, you don't really look for those flashy companies that are breaking records or that promise to change the world as a result.

These investors are more willing to put their money into duller, more stable companies that are likely more mature and, in some cases, may even be experiencing a decline. This is not to say that value investors don't want to grow their positions, but it is. It is not the main criterion they use to choose their stocks, but comes from our second criterion, stock valuation, as the title suggests, value investing is about being a bargain hunter, finding the diamond in the rough and pay 95 cents on the dollar for your position. The idea is that stock prices often deviate from their true value or intrinsic value, so value investors will try to identify stocks with strong fundamentals that are currently selling for less than they should.

By finding and purchasing these companies, the investor will make profits when the stock price eventually corrects and returns to its fair value with the common investor style of focusing on more mature companies that are currently out of favor with the market due to some obstacle. temporary, although some value investors will put money into declining or even bankrupt companies. If they believe they will get back more money than they invested during the liquidation process, there are now many approaches to determining the intrinsic value of a stock, but an easy one for comparing value and growth stocks is the PE multiple, which divides the stock price by their earnings per share to show the investor how much they are paying per dollar of annual earnings.

There are other multiples you can use here that might be more appropriate, including price to book or ebitda ev2, but for the sake of simplicity, I'll stick with pe for this video, the p ratio shows how much an investor is willing to pay by stock trades and, by comparing it to the multiple of its peers and the market as a whole, investors can see which companies are cheaper in their industry, for example. Imagine that a value investor finds a bagel company trading at a five times p e multiple compared to other bagel companies trading at a 10 times p e multiple, the company appears to be cheaper and although the stock is not currently In favor of the stock market, the investor conducts some research and determines that the company has a good management team and solid fundamentals, so, with the belief that the company will eventually return to a multiple of 10 times, the The investor will buy the stock knowing that even if things stay stable, they won't pay out.

Too much for stocks, so there is less risk if things don't go their way Now value investors don't buy stocks just because they are cheap, they will carry out fundamental research to make sure their holdings will perform well. over time and in some cases could even experience high growth, but the idea is to limit how much you pay for these stocks, on the other hand, growth stocks tend to be more expensive and will often have quite high price ratios, It is not uncommon to find that these companies are trading at 30, 40 times and even 100 times their earnings within the growth universe, sometimes the multiple is not even applied because they do not have earnings to support their valuation because these companies are reporting growth higher than average, although they tend to attract high investor demand, which is what leads to higher valuations, a higher share price compared to lower profitability, now this can make it more difficult for the investor to obtain a return because you are paying a premium for these stocks you will need to earn more to justify the investment, but growth investors will pay this price if they believe the stock's growth is worth the price, for example, imagine a growth investor finds a technology company trading at a p e multiple of 30 times, while this multiple may seem expensive.

The investor might buy the shares if he sees that the underlying company is growing rapidly. If the company doubles its operations in a couple of years, the shares will not seem as expensive for what the investor paid for them, so the growth of the underlying company and the valuation of its shares are two key characteristics of value in Growth investing and each style focuses on one of these two characteristics. The final differentiating factor is the stock's volatility, or how much the stock price fluctuates. Now, this is not something that investors are inherently looking at. when they decide which company to invest in, but because growth companies tend to be younger companies with higher valuations, their stock prices tend to jump more than value stocks, which are often more stable, so That, while a growth stock may experience a stock return of thirty percent one year - negative forty percent the next and then sixty percent a value stock will often be a little duller perhaps returning eight percent constant per year, so those are the traits that differentiate the types of stocks that each approach focuses on, and as you can imagine, each style exposes the investor to a number of different advantages and weaknesses for growth investing.

The main advantage is the higher performance potential, as you would probably expect. Finding a company from the beginning that dominates the field can make those involved quite wealthy. However, the downsides are that this tends to be a riskier approach, not only are these stocks more volatile, but growth stocks are often bought and sold on the promise of exceptional future growth, often without a story. back it up, this is a problem considering investors are paying a premium for this stock if investors pay a 30x multiple for a company that has been growing 40x per year and next year the company reports miserable growth of 5, the valuation has a long way to go if the market suddenly eliminates its growth premium.

We might hear, for example, that these companies are priced perfectly, meaning anything that doesn't reach that level can really hurt the stock price when it comes to value investing. The pro is that it is often the boring approach, meaning it is less volatile and less risky, typically a value investor will put money behind more established companies with a longer track record of success, reducing the likelihood that Some drastic change affects the price of its shares. The disadvantages are that it can take a long time for the value of a stock to surface. Identify a stock that is undervalued, but if it takes 20 years to see its value redeemed, then it may not be a good holding.

In addition to this value, investors may fall victim to what is known as the value trap, where They focus too much on buying cheap. stock and end up with shitty positions that are only getting cheaper, you see, just because the stock is cheap doesn't mean it's a good buy and there's always a chance the valuation could fall further than it currently is if the business underlying is deteriorating. You may find a company with a multiple of five times, but if it goes bankrupt, it will all be in vain, as you can see that both styles present different opportunities and drawbacks, but which is the superior approach.

Well, the answer depends on when you ask the question okay. According to a Bank of America Merrill Lynch study, value stocks outperformed growth stocks over a 90-year period starting in 1926, gaining 17 percent annually compared to growth of 12.6 percent; However, growth stocks have taken the crown over the last decade, having outperformed value stocks since 2007 by a fairly large margin for some, this indicates that value investing is dead for others, it is nothing more than a sign that the markets have become overly optimistic and that a reversal is just around the corner. Regardless, growth value investing can be seen to perform better during different periods of time.

It's true that growth stocks often take the lead during prolonged bull markets, but here's the thing: while some people may religiously follow to the tenants of the value investor or criticize anyone who is not buying the latest and greatest stocks, aspects of both styles can be applied, many people will hold both growth and value positions in their portfolio to diversify their positions and there are also strategies hybrids. Garp, for example, means growth at a reasonable price and involves investing in growth companies with strong fundamentals that are not too expensive, so there are some approaches that balance both, so while many of us like to identify As growth or value investors, the truth is that we are all looking for solid companies to back our money, so there is no need to compete. some of us are simply better at investing than others and that's nothing to get upset about, what are my returns?

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