Growth investing and value investing are often viewed as being opposing theories on investing, two viewpoints that don't mesh together and won't work in conjunction. The classic viewpoint would be that an investor can't be a member of both schools of thought. However, still others have since proved that, while the fundamental principles guiding each style are very different, many of the same concepts of finding maximum value remain in play. Berkshire Hathaway's (BRK.A) Warren Buffett was once quoted as saying that "Growth and Value investing are joined at the hip."
So, what are these two ideas really about? What makes them so different and why are they still, on some level, still the same?
At the core of value investing is the desire to get the most for your money. Value investors seek out stocks that are undervalued when compared to the underlying value of the company they represent. By looking at book value and the ratio of price to earnings (among other things), value investors find companies that aren't getting love from the markets and buy while the price is right. In essence, value investing is about buying the assets of a company at the cheapest price possible.
On some level, value investing is short-sighted, focusing on the present and letting the future sort itself out. By placing quantitative values on companies, value investors are simply relying on the markets to identify that value in the long term and correct themselves. As such, investors getting in while the stocks are cheap will benefit from that correction.
Growth investing, unlike value investing, is focused entirely on the future. Growth investors seek out stocks that, regardless of their current price and valuations, are poised to break out and grow with strength in the future. It's a strategy that involves plenty of judgement calls and speculation, but it's one that's served many investors well throughout the years, including Thomas Rowe Price, Jr., known as "the father of growth investing."
Growth investors have fewer statistics that can be viewed as useful as the key element of growth investing is identifying those stocks poised to break out and grow faster than other companies. This can be related to performance over the last year, earnings growth over that same period, projected growth over the next five years, the sector and industry a company's in, the quality of management, or even an idea driving business growth that's revolutionary in nature. Clearly, picking growth stocks is difficult, but when successful it can mean massive returns.
Differences and Similarities
The core differences between growth and value investing should be fairly clear. Value investing is more quantitative in nature where growth investing appears to be more qualitative. Value investing focuses more on the present while growth investing keeps the focus on the future. Value investing looks for the best possible price while growth investing will overpay for the right company.
For everything that separates these two strategies, there are some core elements of both theories that aren't as diametrically opposed as some make them out to be. Firstly, while value investing is focused on present value, this strategy could just be viewed as one method of growth investing. One way of identifying stocks poised to grow is to focus on stocks that are undervalued as those would seem to be likely stocks to take off. What's more, growth investors are also concerned with value. They're just taking a different perspective on it. Any stock that's poised to grow faster than the rest of the market has intrinsic value and growth investors are still buying stocks cheaply, they're just buying them cheaply when weighed against future gains rather than present value.
So perhaps focusing on what's different between these two investing styles is itself a flawed approach. Investors don't get higher dividends of better returns for sticking to one investment style or theory, and allowing a variety of ideas and concepts to influence one's decisions is most likely the wisest choice in the end.
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