Growth investing and value investing are similar yet different financial concepts that motivate investors depending on several factors. These motivations vary from person-to-person based on their personality, upbringing, short—and long-term goals, FOMO (fear of missing out), and financial education. Everybody is different, and investing is a personal journey.
Growth investing is a strategy that involves investing in companies that are on the cusp of, or are already experiencing, above-average growth in terms of strong earnings. These companies have the potential to outperform the overall market or a specific segment for a significant period of time. Therefore, even if a stock is trading at a high price, investors are more focused on the potential growth of the company than the immediate share price.
Value investing, on the other hand, takes a different approach. It is a strategy that involves purchasing stocks that are trading at a discount, below their book value, and are considered undervalued in the market. There are different strategies investors employ to seek out undervalued investments. One of those is the analysis of the Price-to-Book (P/B) Ratio. This technique measures the market’s valuation of a company relative to its book value. (P/B) ratios under 1.0 are considered attractive investments for value investors. For example, you take a company’s current stock price per share and divide it by their book value per share (BVPS) to get the P/B ratio However, this is just one way to value a company, and nobody can truly predict how the future is going to play out.
How is the Game Played?
Investing (growth or value) is gambling. You are using real money and taking on actual risk. However, the difference between betting in a casino and being an investor is the ability to play the game, not solely on chance. Regardless of whether you are interested in being a growth or value investor, both strategies require you to:
- Do your research.
- Study companies you understand.
- Learn how the company generate revenue.
- Remember that you are not buying stocks, you are buying businesses. It is critical to learn how to distinguish a well-managed company from a façade. You don’t want to be the owner of a poorly run business, even if the stock is trading high because eventually the poor management will catch up with the business.
- Find out if the company offer products and services that can grow in a changing market.
Value Investing Through the Experience of a Regular American Worker
Grace Groner was a woman who worked as a secretary for Abbott Laboratories for over 40 years. In 1935, she purchased three shares of Abbott stock for $180, $60 per share. That is all she bought. She then, more or less, forgot about it for the next 70 years. She didn’t buy more, nor did she sell.
At Ms. Groner’s passing, due to compound interest and the stock splitting numerous times, Grace’s $180 investment ballooned to around $7 million. Investors must understand that there are no guarantees that they can mirror this kind of growth over 70 years of holding and managing their own portfolio. Instead, it is a story to help investors understand how value investing works conceptually.
Another popular investment approach that interests both growth and value investors involves focusing mainly on dividend stocks, companies that pay their shareholders a return on investment, usually quarterly throughout the year.
Which Investing Strategy is More Beneficial?
Neither is necessarily more beneficial than the other because it depends on the investor’s short- and long-term investment goals and risk tolerance. Growth investors will pay higher prices for stocks they expect to grow faster than the niche or the overall market. Value investing, alternatively, can be seen as a less risky approach to investing. For risk-averse investors, value investing may be the preferable choice.
Consider Investing in a Financial Professional
Investing can be an excellent way to save, grow, and preserve wealth. However, it is still a risk, and there are many unfortunate stories of people who made uninformed or risky decisions that cost them significant financial loss. Investing and finance are highly complex, and it can be easy to overlook important details, especially if their impact won’t be for many years down the road. Consider meeting with a financial professional to discuss your investment portfolio, strategy, and goals.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Sources:
What Is Growth Investing | Bankrate
Value Investing Definition, How It Works, Strategies, Risks (investopedia.com)
Grace's Story | GEGF (gronerfoundation.com)
How to Compare Market Capitalization & Stockholder's Equity (chron.com)
Price-to-Book (PB) Ratio: Meaning, Formula, and Example (investopedia.com)
This article was prepared by LPL Marketing Solutions
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