Growth Investing vs Value Investing
There are a myriad different ways to assess and select
stocks and other investment opportunities, two most important strategies are
Growth and Value Investing.
Growth Investing
Growth investing involves picking and investing in stocks
that have good growth potential. Usually a growth stock is one whose revenues,
cash flows and earnings (profits) are expected to grow at a rate which is
higher than the industry or overall market. Growth stocks usually do not pay dividends
and concentrate on reinvesting the profits as they expect to generate higher
returns.
Growth stock investing typically does not put much stress on
valuation measures, but on the recent and expected growth in revenue, margins,
profits and cash flow. Parameters such
as P/E, P/BV, P/NAV and so on are not of great importance to the investors. It’s
the growth rates that are important.
The risk of this type of investing is that stocks can be
overvalued and the investor may end up paying a high price. Another risk is
that the projected growth may eventually slow or even collapse.
Value Investing
Value Investing involves selecting stocks that trade for less
than their intrinsic values / fundamental values (based on Dividend, Net
profits, sales etc). Value stock investors like to buy a good business at
highly attractive price.
The share price
in relation to the intrinsic value of the company is the key. The intrinsic
value could either be as a going concern, or broken up or liquidated. In either
case, the investor is either depending on a catalyst, some internal or external
agent or force to cause the company to generate more profits or cash, or for
other investors to recognise the value also, and bid up the price of the
company.
Features of Value Stocks include High Dividend Yield, Low
P/BV Ratio, Low P/E Ratio
Comments
Post a Comment