James Royal, Ph.D. | Bankrate.com (TNS)
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 Apple and Nvidia, have handily outperformed value names. But it’s not always that way, and many investors think value will once again have its day — although they’ve been waiting on that day for quite some time.
Here’s what some top investing pros 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, senior investment director at Dimensional Fund Advisors in Austin, Texas. “That’s one of the most fundamental tenets of investing.”
Many of America’s most famous investors have been 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.
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Source:: The Mercury News – Entertainment
