The Difference Between Value and Growth Investing

Posted by: Joseph Kuo | August 20, 2021

Investing
As you watch what’s happening in the stock market, it’s important to understand the difference between investing in value stocks versus growth stocks. Like all stock speculations and predictions, there is of course no guarantee of actual performance.

At different times the stock market has favored either value investing or growth investing. For example, since the 2008 market downturn, the market has largely favored growth stocks. But there are some experts and analysts who believe that value stocks could be making a comeback due in part to fundamental changes caused by the pandemic.

As you watch what’s happening in the stock market, it’s important to understand the difference between investing in value stocks versus growth stocks. Like all stock speculations and predictions, there is of course no guarantee of actual performance.

What Is Value Investing?

Value investing is essentially bargain hunting. When using a value investing strategy, investors are looking for stocks that they believe are being undervalued by the market. If they consider a stock to be underpriced, it’s an opportunity to buy. If they consider it overpriced, it’s an opportunity to sell. Once they purchase a stock, value investors seek to ride the price upward until the security returns to its “fair market” price, and then sell it once this price objective is reached.

To determine a value investment, investors make an analysis based on the company’s balance sheet and financial statements to get a clear picture of its assets, liabilities, revenues and expenses.

Risks of Value Investing

As with any stock, there’s never a guarantee that a stock will appreciate in value as much as an investor expects it to. A stock an investor believes to be undervalued may remain undervalued, or even drop in value.

What Is Growth Investing?

Growth investing makes use of up-to-date information to identify stocks from companies that are anticipated to do well in the future. The idea is to look for “winning companies” within industries that are expected to experience substantial growth.

Growth investors seek companies in a position to generate revenues or earnings greater than what the market expects. When growth investors find a promising stock, they buy it, even if it has already experienced rapid price appreciation, in the hope that its price will continue to rise as the company grows and attracts more investors.

Whereas value investors typically base their analysis on actual data, growth investors use criteria. Growth investors are less concerned about current value and financial statements and more concerned about whether a company is exhibiting behavior that suggests it will be one of tomorrow’s leaders.

For example, growth investors may favor companies with a sustainable competitive advantage that are expected to experience rapid growth, that are effective at containing cost and that have an experienced management team in place. Even if such a company is not currently profitable, it might still be considered a growth stock if the company is anticipated to project rapid and sustained revenue growth relative to other companies in its sector.

Risks of Growth Investing

Growth investments may have an above-average price-to-earnings ratio (PE ratio), but they may in some cases be prone to higher volatility than value investments. These investments are typically bought at an already high price, and there’s always a risk that the price will fall or cease to rise any further.

Key Differences

Value investing and growth investing follow the same general purpose – to buy low and sell high. The key difference between these two guiding principles is this: value investments have generally already proven their worth, while growth investments show potential for future worth. In other words, both investment types are banking on the assumption that the value will rise, but for different reasons.

In regards to your own portfolio, you may find that a mix of value and growth investments could provide a healthy and diverse assortment. Work with your investment advisor before making any decisions regarding your portfolio.

If you'd like help with growth or value investing, contact me by email at joseph@abundancewp.com, or schedule a meeting by clicking the button below:

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