Growth Stock Investing Versus Value Investing

What are the differences between the two, and does one work better than the other?

Growth Stock Investing

This form of investing was especially popular in the dot com era - growth investors invested extensively in high growth industries such as biotechnology and dot coms back in 1999. Growth investors bet on the stock's strong future returns, and are willing to pay more than what the stocks are really worth based on today's returns. This can easily create speculative bubbles - the most famous recent growth investing bubble was the one that burst in March 2000. Nonetheless, growth investors will also look to traditional industries if they predict a possible major change in trend or change in consumer tastes.

In contrast to value investing, investing in growth stocks also means foregoing the dividend yields that traditional stalwarts would offer. This is because growth stocks are also usually small to medium cap stocks - while Microsoft might have been an excellent growth stock pick back then, it has now reached the maturing stage where it would be difficult to double its value in one year.

Value Investing

Value investing means to invest based only on the actual value of the company today. The company must have strong assets, low debt, strong earnings, strong cash flow and a stable, established market position. The most famous value investor is probably Warren Buffett, who mastered this approach on his path to becoming the wealthiest investor in the world.

Value investors such as Warren Buffett are bargain hunters. They pay careful attention to the times when stocks are under-priced. These are the times when the market prices the stock below what it is actually worth, actually due to short term fluctuations. They look for competitive barriers that build a strong moat for the company; these include intellectual property rights, strong brands, and so on. These companies whether financial storms relatively well, and provide greater portfolio security.

Growth Stock Investing versus Value Investing

Given the current market conditions, growth investing is gradually shifting out of favor. Present market conditions suggest that it is time for bargain-hunting - value investing. The question that hangs over us all is whether we have already hit rock bottom, or if the bottom is going to fall out altogether.

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