Growth Investing or Value Investing?
The answer to what´s the best might suprise you
What is Growth Investing
What is growth investing
Growth investing is a strategy where investors focus on buying stocks of companies expected to grow at an above-average rate compared to other companies. These companies typically reinvest their earnings to expand their business rather than paying dividends.
Investors hope that the stock prices will increase significantly over time, providing substantial returns. This approach often involves investing in newer, innovative companies with high growth potential.
How does it work
A growth investing strategy starts with the investor looking for stocks with higher-than-average growth potential. These stocks often belong to smaller and newer companies, but they can also be from larger, established companies.
The investor typically invests equally in a few stocks, usually 10 or 15. They let their winners keep growing and losers keep shrinking, meaning the winning stocks will have a bigger impact on the portfolio.
Additionally, investors often reinvest their monthly contributions into the winning stocks, allowing them to grow even more.
What is Value Investing
What is value investing
Value investing can be interpreted in two ways. Firstly, it involves investing in undervalued stocks that are expected to reach their true valuation over time. In this sense, all types of investing can be seen as value investing, as the goal is to buy low and sell high.
However, value investing more commonly refers to using quantifiable ratios to find value, such as the price-to-earnings (P/E) ratio, price-to-book (P/B) ratio, and others. This approach emphasizes careful selection to avoid buying "overvalued stocks" and aims to identify investments that offer strong potential for long-term growth based on their intrinsic value.
How does it work
If you're practicing value investing, your initial step would likely involve using a stock screener. This tool allows you to input various ratios and metrics used to assess a stock's value. Typically, you'd be looking for stocks with reasonable or very low numbers in these metrics. For instance, value investors often prefer stocks with a P/E ratio below 25.
Once you've identified suitable stocks, the strategy would involve investing an equal amount into each of them. This approach continues with each paycheck. At the end of a period, such as a year, you would rebalance your portfolio. This entails selling off stocks that have performed well (winners) and purchasing those that have underperformed (losers). This action aims to adjust your portfolio's composition, potentially reducing your average cost while enhancing future potential gains.
Who is the winner
Short answer
The type of investing you choose isn't crucial; what matters is selecting an approach that you feel comfortable with. Both growth and value investing have proven effective over the years and can help you achieve your goals, just through different strategies.
Long answer
The longer explanation is that it depends on the economic period. During times of frequent recessions, a value strategy typically performs better because it tends to retain gains more effectively than a growth strategy. Additionally, a value strategy is less impacted by high interest rates than a growth strategy.
Conversely, during periods with fewer recessions, a growth strategy often outperforms, as it can take greater advantage of a robust economy than a value strategy can.
Conclussion
If you could somehow predict whether we're heading into a period of economic strength or weakness, one strategy would indeed outperform the other. However, this is currently extremely difficult, if not impossible, to determine with certainty.