Growth Investing vs. Value Investing: What's the Difference?
Have you ever heard a person refer to himself or herself as a “value investor” or a “growth investor?” Do you ever wonder what those terms mean?
In this article, we’ll explain the principles of “growth investing” and “value investing,” look at notable investors in each field, and discuss lessons that all investors can derive from these two models.
What's the Difference?
Growth investing is a strategy in which investors select stocks (or make other investments) in companies that are expected to have a high growth rate. Growth investors look for companies that are expected to outperform the market, and their primary goal is to achieve capital gains.
“But wait,” you’re probably wondering. “Don’t ALL investors do that? Who wants to invest in a company that’s expected to underperform?”
The short answer is yes. All investors want growth to some degree or another. But the long answer is that growth investors prioritize a company’s expected growth over other characteristics, such as stability or value.
Value investing, on the other hand, is a strategy in which investors select stocks (or other investments) in companies that are assumed to be trading for less than their intrinsic value. In simple terms, value investors look for stocks that are “on sale” for less than they’re worth. They examine metrics such as a company’s price-to-book ratio or price-to-earnings ratio in order to estimate a company’s worth.
Of course, the “true worth” of a company can be tough to estimate, especially when factors like “goodwill” (a company’s reputation) come into play. Give 10 investors the same data, and it’s likely you’ll arrive at 10 different estimates.
To compensate for this, most value investors use a “margin of safety” when they’re buying a stock that they believe is undervalued. In other words, they’ll buy a stock only if it’s selling at a cost that leaves room for error.
Philip Fisher launched his career on Wall Street in September 1929 — one month before the devastating crash that marked the beginning of the Great Depression.
Despite the “agony” of that time, Fisher remained on the lookout for growth. Within two years — in 1931 — he started his own investment firm, Fisher & Co, which followed a growth investing philosophy.
Fisher invested heavily in companies that grew profits as the American economy pulled out of the Depression and the Second World War. One of his largest investments was in Motorola, which he bought in 1955 when it was a young startup, and which he held until his death in 2004. He was famous for saying that if a company is strong, well-managed and able to grow, there’s no reason to sell it.
Fisher is known as the “Father of Growth Investing.” Ironically, his son is a value investor.
That son, billionaire Kenneth Fisher, has published several papers discussing classic value-investor metrics, such as the correlation between P/E and nominal stock price. Although he’s one of America’s most successful value investors – Forbes Magazinenamed him #259 in its list of richest Americans — he’s not the most famous.
That distinction belongs to Benjamin Graham, the “Father of Value Investing.” Graham, who also launched his career during the Great Depression, published a list of “10 Rules” that value investors should examine before buying stocks. Those rules are designed to evaluate the true worth of a company – using metrics like tangible book value and total debt – and compare it to the common stock’s trading price.
You don’t have to completely identify with the “growth camp” or the “value camp.” Most investors are a little bit of both. Notable investor Warren Buffett has said that his philosophy is “15 percent (Philip) Fisher and 85 percent Benjamin Graham.”
Growth investing teaches us that a company’s fundamentals — the strength of its industry, its assets, its debt, and its management — determine its capacity for capital gains.
Value investors remind us that even if a company has stellar fundamentals, other investors might have run the stock price up so high that the share price no longer justifies the investment.
In other words, examine both. There’s no point in buying a company with a weak future ahead, and there’s no point in paying too much for a stock.
Tell Us…Do you have a preference for one or the other – growth investing vs. value investing?
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
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