Value vs. Growth Investing

Often, specifically in the genesis of an investing career, we come across two common investing terms that can be very confusing: value investing, and growth investing. Both strategies seek to produce the best returns; both claim to be the best investment decision. Why the difference in name? Like most goals there are several different approaches to get where you’re going.

Growth investing, as the name suggests, is the approach that attempts to seek out companies that will experience faster than average growth. Growth can be measured by revenues, earnings, or cash flow. The way the business is managed is also very important. For example, many growth-styled companies are more likely than value-styled companies to utilize profits for capital expenditures; this can be the purchasing of additional factories, company acquisitions, or other projects.  This is seen as more beneficial than simply using profits to buy back stock or pay out dividends to shareholders.

The goal may be to outperform the market by identifying these growth-type companies, but it is important to understand that there is no free lunch; it is impossible to get something for nothing. Growth companies tend to represent a greater risk than value companies. That is why if one plans on investing in growth companies, mutual funds, whatever; it should be clear that often a higher risk tolerance is required.  

Value investing on the other hand attempts to find the “diamonds in the rough”; this meaning companies that are trading at levels below their fundamental worth; there are many reasons this could be the case. Often entire industries fall on hard times, companies have awful earnings reports, or there is just a horrible perception about the company; these are just a few reasons that a company could be trading at a discount.

In general, value companies tend to be perceived as less risky than growth, often value companies are mature names that are paying consistent dividends to their shareholders.  

This is of course the tip of the iceberg; analysts use complex models and forecasting techniques to best ascertain the future performance of both growth and value names. That is probably not your job as an investor; but it is your job to understand to the best of your ability what you’re investing in.

 

-Luke