It’s the perennial question among stock investors: which is better – growth investing or value investing? Recently, there’s been little contest. Growth stocks, such as Amazon and Apple , have handily outperformed value names. But it’s not always that way, and many investors think value will once again have its day, though they have been waiting on that day for quite some time.
Here’s what investors say about growth and value investing, and when we might see value investing begin to outperform again. Differences between growth investing and value investing
Many see the distinction between growth and value as somewhat arbitrary, but it’s useful to lay out what might differ between the two approaches, even if it seems a bit like a stereotype. Growth investing
Growth investors look for $100 stocks that could be worth $200 in a few years if the company continues to grow quickly. As such, the success of their investment relies on the expansion of the company and the market continuing to price growth stocks at a premium valuation, as measured by a P/E ratio maybe, in later years if the company continues to succeed.
Growth stocks are sometimes also called momentum stocks, because their strong upward rise leads to more and more investors piling into them. Sometimes that movement occurs regardless of the company’s fundamentals, as investors build “pie in the sky” expectations around the company. When those expectations aren’t realized as quickly as some investors expect, a growth stock can plunge, though it may later rise with renewed optimism. Value investing
In contrast, value investors look for $50 stocks that are actually worth $100 today, not in a few years, if the company continues its business plan. These investors are typically buying stocks that are out of favor now and therefore have a low valuation. They’re betting on the market’s opinion becoming more favorable, pushing up the stock price.
“Value investing is based on the premise that paying less for a set of future cash flows is associated with a higher expected return,” says Wes Crill, head of investment strategists at Dimensional Fund Advisors in Austin, Texas. “That’s one of the most fundamental tenets of investing.”
Many of America’s most famous investors are value investors , including Warren Buffett , Charlie Munger and Ben Graham, among many others. Still, plenty of very wealthy individuals own growth stocks, including Amazon’s founder Jeff Bezos and hedge fund billionaire Bill Ackman, and even Buffett has shifted his approach to become more growth-oriented these days.
Growth investing and value investing differ in other key ways, too, as detailed in the table below. Company features Growing quickly, hot new product, tech stocks Growing slowly or not at all, older products Valuation (P/E ratio) Higher Lower Stock popularity In favor, “momentum” stocks Out of favor, “cigar butts” Dividends Less often More often Stereotypical stock Amazon, Apple, Facebook Procter & Gamble, Exxon Mobil, Johnson & Johnson Volatility Higher Lower But the difference between growth and value investors can sometimes be artificial, as many investors agree. Regardless of their style, investors are trying to buy a stock that’s worth more in the future than it is today. And both value companies and growth companies tend to expand at least a little over time and often significantly. So the definitions of the terms are a bit slippery.
Typical investing wisdom might say that “when the markets are greedy, growth investors win and when they are fearful, value investors win,” says Blair Silverberg, CEO of Hum Capital, a funding company for early-stage firms based in New York City.
“The 2020s are a little different,” Silverberg says. “There are real tailwinds to technology companies and you can actually find value by buying great companies at fair prices.”
And sometimes the difference between the two investing styles may be largely psychological.
The market sometimes overlooks the “earnings growth potential in a company just because it has been bucketed as a value stock,” says Nathan Rex, chief investment officer at Eigenvector Capital in Stamford, Connecticut. Which is better: growth investing or value investing?
The question of which investing style is better depends on many factors, since each style can perform better in different economic climates. Growth stocks may do better when interest rates are low and expected to stay low, but many investors shift to value stocks as rates rise. Growth stocks have had a stronger run recently, but value stocks have a good long-term record. Growth stocks continue to outperform
Currently growth stocks have been having a nice go, with the last decade spent […]
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