Value Investing vs. Growth Investing

Two major styles of investment strategy up for discussion: growth investing and value investing. Though they’re sometimes seen as opposing forces, both strategies offer unique advantages and risks, and the key to success lies in understanding how they work, when to use them, and how they fit into your personal investing goals.

Talking points:

• What is Value Investing?

• What is Growth Investing?

• Key differences

• Risks

• Historical performance

• Combining both strategies

• Which is right?

What is Value Investing?

Value investing revolves around finding stocks that are currently undervalued by the market but have the potential to recover and appreciate over time. This style is often associated with the legendary investor Warren Buffett, who learned from his mentor Benjamin Graham, the father of value investing. Value investors companies that are trading below their intrinsic value due to temporary factors like industry downturns, a public crisis, or negative press, but whose financials remain solid.

These stocks tend to have low price-to-earnings (P/E) ratios and high dividend yields. These "diamonds in the rough" companies have seen their prices drop for reasons unrelated to their long-term potential. Often, these are larger, well-established companies in consumer staple sectors such as energy, financials, industrials, and materials.

However, value investing does not guarantee a return. Stocks may not rebound as expected, and some could even fall further. In those cases, investors have fallen for a value trap where they buy up a ton of low priced stock only for them to continue underperforming.

What is Growth Investing?

Growth investing, sometimes called momentum investing, involves betting on companies showing rapid growth and high potential for further future growth. Growth investors target stocks of businesses that are rapidly expanding in terms of earnings, revenue, or market share. They’re often seen chasing high-flying stocks in sectors like technology, healthcare, or consumer discretionary, where modern innovation is impacting the hardest. 

The strategy is more about capital appreciation—investors expect the stock’s value to continue to grow significantly over time, even if the stock is already priced higher than the market average. Companies like NVIDIA, Tesla, Amazon, Facebook, and Google have been darlings of growth investors in recent years.

Again, however, there are risks. If the expected growth doesn’t materialize (for example, due to a new product flopping or competition outpacing the company), the stock price can plummet. Additionally, growth investments are based on optimistic projections of the crowd, meaning that much of the price of the stock is inflated by other speculative investors. This falls under a fundamental rule of investing: high risk leads to high reward. 

Key Differences

The main distinction between growth and value investing is that value investors look for stocks that are undervalued by the market, while growth investors look for companies that are expected to grow at an above-average rate in the future. Value stocks tend to be more established companies with stable financials, while growth stocks are often younger, more innovative companies with higher risk and reward potential.

Value investing: Buy undervalued stocks with the expectation they will rebound over time.

Growth investing: Buy stocks in companies with high potential for future growth, betting on sustained expansion.

Risks

Value Investing Risk: Value stocks can sometimes fail to recover, or they may take longer to rebound than investors anticipate. This could result in a prolonged period of low or negative returns.

Growth Investing Risk: Growth stocks, especially those priced based on lofty expectations, can experience sharp declines if those expectations are not met. For instance, a tech company with a promising product could see its stock plummet if the product fails or market conditions change.

Historical Performance: Value vs. Growth

Historically, value investing has outperformed growth investing over the long term, but there have been periods, especially recently, where growth stocks have outshone their value counterparts. In the past decade, growth stocks, particularly in the tech sector, have seen enormous returns, while value stocks lagged behind.

From 1995 to 2020, growth mutual funds returned over 1,000%, while value mutual funds returned 623%. However, during market downturns or recessions, value stocks often perform better due to their stability and steady income from dividends. It’s important to remember that the market goes through cycles, sometimes favoring value stocks, other times favoring growth.

Combining Both Strategies

Instead of choosing one strategy over the other, many investors opt for a blended approach utilizing stocks of both types. This strategy can help smooth out volatility by capturing the upside potential of growth stocks while benefiting from the relative stability of value stocks.

A blended approach may not outperform either growth or value investing in the short term, but it offers diversification, which can reduce overall portfolio risk. You can even invest in index funds or mutual funds that balance both growth and value stocks, allowing you to take advantage of whichever strategy is in favor at the moment.

Which Strategy is Right?

The decision between growth and value investing depends on your investment goals, time horizon, and risk tolerance. If you're in a position to take long-term investments, looking for stable returns and dividends, value investing may align with your goals. On the other hand, if you're in a position to take on higher risk in exchange for the potential of rapid capital appreciation, growth investing could be a better fit.

If you're unsure which to choose, consider balancing both styles in your portfolio or experimenting with either strategy. Over time, the market’s shifting cycles will provide opportunities for both growth and value investing. 

Ultimately, the goal for any investor is to buy low and sell high, whether you do this by buying undervalued stocks or by betting on the future growth of promising companies, either is uniquely yours to choose.

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Written by Ethan Qian-Tsuchida

Newton South High School student 

Interests in finance, economics, risk management, and teaching others about fun topics to make the world of finance and economics approachable. 

LinkedIn - https://www.linkedin.com/in/ethan-qian-tsuchida-a0a7991b9/ 

Email - ethan.qiantsuchida@gmail.com