At different periods of time, the stock market favors different investing “trends”. These differing areas of the market rotate into and out of favor. One month growth stocks are hot. The next, it’s international. The next, it’s small cap stocks. The next, it’s value stocks. And then the cycle starts itself over again. Or it doesn’t.
We’re not in the prediction business, so this should not be misconstrued to be investing advice. We do not know which area of the market will do best over the next day, week, month, or year.
But what we do know is that, over the long term, investing in a diversified manner, tends to pay off.
With that being said, we wanted to take a minute and break down the differences between two major investing themes. Growth vs. Value.
During the end of 2020, and the beginning of this year, we saw a lot of value type stocks performing well. But as the summer’s gone on, we’ve seen growth type stocks pick up steam and lead the charge. Past performance is not indicative of future results, so we’re not saying this will continue.
But we also want to educate our readers to help them figure out what is best for them. So below are some key differences between growth investing and value investing.
What Is Value Investing?
The idea behind value investing is that investors are, essentially, bargain hunting. They’re 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.
There’s no 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 essentially uses today’s information to identify tomorrow’s strongest stocks. The idea is to look for “winners” – stocks of companies within industries that are expected to experience substantial growth. Think a lot of the tech names.
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.
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.
Value Investing = the investor believes the price of the stock doesn’t represent the value of the underlying company and therefore thinks the price of the stock will rise.
Growth Investing = the investor believes the underlying company will continue to grow and therefore the price of its stock will rise.
Growth and value investing are two pillars of the investing world. Some folks say “value is dead”. While other folks say “growth can’t continue to grow forever”. The metrics investors use to measure value and growth can be twisted and contrived to fit almost any narrative.
We’re not saying that value is better than growth or growth is better than value. There are benefits and drawdowns to both styles. And every investor has their own preferences.
Our job, as investment advisors, is to act in our client’s best interest. It is not to try and predict whether value is going to beat growth over the next 6 months. Anyone who claims to be able to predict the future like that should be avoided.
We know that different areas of the market will do better at different times. But instead of trying to time when that is going to happen, we find it more sensible to build reasonable diversified portfolios as part of a financial plan.
You can have the “best” investment strategy in the world, but what good is it if you can’t stick with it when things go south? The value vs. growth debate is meaningless if you don’t know what your investments are for. That’s why the very first thing we do is help folks figure out what their goals are.
Once you know what your investing goals are, then and only then can you decide which investment style is appropriate.
But we also want our clients and readers to educated and understand the investing world as best they can. So we hope that you now know the difference between value and growth stocks! And hopefully that helps you on whatever path you choose!
**This should not be considered investment advice and past performance is not indicative in any way of future results**
*Please get in touch with us if there are any questions*