T.The approaches that investors use to expand their investment portfolios are diverse and sometimes confusing for those unfamiliar with the difference between certain investment styles.
There are significant differences between two popular – and often confused – investor strategies, value and growth. And because these strategies are so important to understand, each one needs an explanation.
What is value investing?
Value investors carefully examine the fundamentals of a publicly traded company to determine its intrinsic value – or the “true” value of the asset based on the present value of its future cash flows. When a company’s stock price is well below its intrinsic appreciation, commonly known as the safety margin, they invest. Otherwise they pass.
Warren Buffett is undoubtedly the one most famous value investoralthough it was his mentor Benjamin Graham who drove the value investing approach. Buffett and his partner Charlie Munger have built one of the most successful and profitable business empires in the world in Berkshire Hathaway using a value-based investment approach.
As with any other method, the greatest volatility in value investments is market volatility. Eventually, fixes occur and even the occasional crash. If you want to invest, you have to be mentally prepared to weather these storms and stay on course.
What does growth invest?
Meanwhile, growth investors choose companies with above-average sales or earnings growth. They pay close attention to business fundamentals and other performance metrics, looking for positive trends that could potentially continue well into the future. You are often able to capitalize on a stock’s surge in popularity, which also drives demand.
Thomas Rowe Price from the investment management company of the same name T. Rowe Price is considered to be the Investing father of growth. Many subscribers to this methodology have benefited significantly from this lately. For example, large-cap tech stocks – the hallmark of the modern growth portfolio – have risen sharply since the great recession.
The risk of investing in growth stocks can be significant. Growth investors often buy stocks at an overvalued price when they feel there is room for growth, which could put them at risk if the market slips into a recession or a prolonged correction.
Some of today’s publicly traded companies that peaked amid the dot-com bubble haven’t hit their highs in the early 2000s – others have disappeared entirely. Timing is important for growth investors.
Regardless of which path you take to build your portfolio, knowing the basics can be helpful. Understand the benefits and differences of investing in growth and value to get a clear picture of how each strategy can affect the future prospects of your portfolio.
This article is for informational purposes only and is not a recommendation of any particular strategy. There is no guarantee that predicted results will actually occur.
Views are those of Matthew Blume at the time of publication and are subject to change Pekin Hardy Strauss Wealth Management disclaimer.
The views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.