Value and growth are two concepts that are commonly used in stock and stock mutual fund investing. Investors are often confused about the differences between these two concepts. The fundamental difference between growth stocks and value stocks lies in the way in which they are perceived by the market and investor. This paper will delve into defining value stocks and growth stock. The paper will then outline the reasoning that investors use for purchasing value or growth stocks, the performance of each over the long term, and the preferred investment method.
Value Stocks
Value stocks are stocks that are currently undervalued (Berk & DeMarzo, 2017). As a result, they theoretically provide a superior return. Investors that are planning to invest in value stock look for businesses or companies that are undervalued but still have good fundamentals. A stock can be undervalued for a number of reasons. For instance, public perception can push the value of a company down, such as when a company is faced with a scandal or is involved in unethical conduct. But if the company has good fundamentals in terms of financial performance, investors may see this as an opportunity to invest in the company because they believe the company will provide a superior return when the public forgets about what happened.
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Growth Stocks
Growth stocks are stocks that have the potential for growth over the next few years (Berk & DeMarzo, 2017). They have a substantial growth rate and are expected to outperform the overall market, although there are no guarantees. Growth stocks are represented by high earnings, revenue, or cash flows (Berk & DeMarzo, 2017). It is vital to note that growth stocks are associated with greater risks compared to the value stocks. Investors planning to invest in such stock tend to look for companies that are growing rapidly. This is because such companies are expected to generate high levels of profit growth in the foreseeable future, although there are no guarantees.
Purchasing Value or Growth Stocks
When it comes to purchasing value stocks or growth stocks, investors purchase value or growth stocks for different reasons. Theoretically, value stocks are considered less risky to invest in. More to this, value stocks may still offer some capital growth (Cussen, 2019). It is vital to note that these stocks pay dividends. Value stocks investors seek out bargains for investments that are undervalued. The value stock investors tend to invest in companies that are expected to generate high returns over time.
Growth stocks investors purchase growth stocks as they focus on the long-term and stock appreciation (Cussen, 2019). Rather than paying dividends, growth stocks reinvest retained earnings in order to ensure the company continues to grow (Cussen, 2019). As such, investors purchase these stocks as they look at the growth potential. However, it is vital to note that growth stocks are volatile, and therefore, one needs to diversify their stock holdings. In general, growth stocks have high potential returns and are highly volatile.
Value or Growth Investing over the Long-Term
Historically, over the long-run, value stocks result in better returns compared to growth stocks. Growth stock companies often fail to meet their high expectations, and value stocks outperform them in the long-run. By contrast, investors underestimate the ability to value stocks to recover. However, it is vital to note that growth stocks have started to outperform value stocks in recent years.
Preferred Investment Method
In my opinion, I prefer value stock to growth stocks. This is because they are theoretically considered less risky and volatile. More to this is that they may still offer some capital growth even if they fail to meet the anticipated target price. Secondly, value stocks tend to outperform growth stocks in the long-run. This is as a result of growth stocks often failing to meet their high expectations.
Value or Growth Investor
As of 2019, Warren Buffet is regarded as one of the best value investors. With a net worth of more than $82.4 billion, Warren Buffet is regarded as one of the richest men in the world (Cassell, 2019). Buffet follows Benjamin Graham's investment philosophy. More specifically, Buffet invests in securities that are undervalued based on their intrinsic value.
References
Berk, J., & DeMarzo, P. (2017). Corporate finance. Pearson Education.
Casssell, W. (2019). Five widely successful value investors. [Online]. Retrieved from: https://www.investopedia.com/articles/investing/071415/five-wildly-successful-value-investors.asp . Accessed January 27, 2019.
Cussen, M. (2019). Value or growth stocks: Which is better? [Online]. Retrieved from: https://www.investopedia.com/articles/professionals/072415/value-or-growth-stocks-which-best.asp . Accessed January 27, 2019.
