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Friday, September 15, 2023

5 differences between value investing and growth investing

By Century Financial in 'Blog'

5 differences between value investing and...
5 differences between value investing and growth investing

Synopsis:
The article differentiates between value investing (targeting undervalued, stable stocks) and growth investing (seeking high-potential, volatile stocks). The best approach varies based on an investor's preferences and risk tolerance

Investing in the stock market is considered a great way to build wealth over the long term. However, choosing an investment strategy can take time and effort.

Investors looking to grow their wealth primarily have two key strategies: value investing and growth investing. Both approaches aim to maximise returns, but they differ in their methodologies.

Distinct characteristics help classify stocks as growth stocks or value stocks. The article explores what is value investing and growth investing, as well as how they differ.

What is value investing?

Value investing can be seen as similar to finding a hidden gem in a thrift store.

Value investing is a strategy that involves buying stocks that are undervalued by the market. Value investors look for companies with solid fundamentals, such as earnings, dividends, assets, and cash flow, but trading at a lower price than their intrinsic value.

What is growth investing?

Growth investing can be similar to buying the latest iPhone at a premium, as the buyer believes it will be worth it in the long run.

Growth investing is a strategy that involves buying stocks that have high growth potential. Growth investors believe the market will reward them with higher stock prices as the companies increase their revenues, earnings, and market share. Growth investors are optimistic and willing to pay a premium for the prospects of their investments.

How does value investing differ from growth investing?

There are many ways in which value investing and growth investing differ, but here are five of the most important ones:

Type
Value Investing
Growth Investing
Performance
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Value investing performs better in bear markets or recessions when investors are more cautious and seek safety and stability.
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Growth investing performs better in bull markets or expansions when investors are more confident and seek growth and innovation.
Risk
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Value investing is considered less risk because it involves buying stocks that are already cheap and have a margin of safety.
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Value stocks are less likely to fall further in price.
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Growth investing is considered riskier because it involves buying stocks that are already expensive and have high expectations.
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Growth stocks are more likely to experience volatility and corrections.
Criteria
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Value investors use metrics such as price-to-earnings ratio (P/E), price-to-book ratio (P/B), dividend yield, and free cash flow to measure the value of the stocks.
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Growth investors use metrics such as earnings growth rate, revenue growth rate, return on equity (ROE), and price-to-earnings-growth ratio (PEG) to measure the growth potential of the stocks.
Returns
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Value investing generally offers lower but more consistent returns over time.
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Value stocks usually tend to pay dividends, which provide a steady income stream and compound over time.
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Growth investing may offer higher but more variable returns over time.
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Growth stocks tend to reinvest their earnings, which provides a higher capital appreciation but no or less dividend income.
Time Horizon
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Value investing requires a longer time horizon, as it may take years for the market to realise the actual value of the stocks.
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Growth investing requires a shorter time horizon, as the stores may take months or quarters to achieve their growth targets.

Parting thoughts

Value and growth investing are two distinct approaches to investing in the stock market. Value investors prioritise undervalued stocks with a proven track record, while growth investors focus on companies with high growth potential.

There is no definitive answer to which strategy is right for an investor, as it depends on their personal preferences, goals, risk tolerance, and time horizon.

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