Growth vs Value Investing – New Trader U | Jewelry Dukan

There are two main ways to invest in the stock market: value investing and growth investing. Value investors want to buy a dollar worth 50 cents today, and a growth investor wants to buy just five dollars worth of future value for a dollar today. They’re different ways of thinking, but both can be profitable if done right.

Growth stocks vs. value stocks

Value investors look for stocks that are trading well below the actual intrinsic value of the company’s assets and future cash flows. Growth investors look for stocks in companies that will multiply in value in new markets, with new technology or a new business model.

What is a growth stock?

A growth stock is one that is expected to grow much faster than the overall market return. Growth stocks don’t pay dividends because they’re still building their business and reinvesting all of their profits (if any) back into expanding their capacity.

Growth companies are always looking for new cities if they are retail companies, new markets if they are technology-based, and new countries once they have penetrated their home country. A growth stock is a company that has developed a successful business model and is trying to duplicate it as often as possible to attract new customers and grow in size. Its primary mandate is to grow in size and scope. This allows the stock to increase in value.

The key to growth investing is knowing whether or not a company’s future growth is accurately priced into the stock.

What is a value stock?

Value stocks are stocks that are believed to be trading at a good price relative to the fundamentals of the underlying company. Value stocks are unpopular in the market and tend to be viewed as companies with poor prospects for declining earnings, revenue, or an antiquated business model.

Value stocks are characterized by a very low price-to-earnings ratio, a high dividend yield and a low price-performance ratio. Value investors seek to buy value stocks that the market has oversold when they believe the company is worth more than the market has priced it in.

Value stocks are those that can increase in value many times over if the company has a turnaround or even just new management and a new narrative. The most valuable investments are in companies that look like they’re about to go bankrupt, but aren’t and become turnaround stories. The stocks that are truly bankrupt because the math doesn’t show them as profitable companies are not value stocks and should be avoided.

Value stocks also tend to have high short-term interest and can experience short-term bottlenecks when the news is good.

When choosing their stocks, value investors focus on the fundamental value of the underlying company versus the stock price metrics. They look for an excellent risk/reward ratio when entering, leaving little downside risk to the price.

What’s the difference between a value stock and a growth stock?

Value stocks allow the investor to buy a company at a great price, growth stocks allow an investor to buy the future value of a company at a great price today.

Value stock investors look primarily at the value of the company’s current balance sheet, while growth stock investors look at the value of future earnings, sales and profits.

Value stocks primarily focus on a company’s historical value versus current price, growth stocks primarily focus on the future value of the company versus current price.

Value investors focus on the stock price, growth focuses on the company’s future.

Value stocks are there to buy low and sell higher, growth stocks are there to buy high and sell higher.

Many value stocks are near 52-week lows, many growth stocks are near all-time highs.

Value stocks are typically for companies trying to solve the company’s problems, growth stocks are for companies trying to solve the world’s problems.

High-quality value stocks often pay investors large dividends, while high-quality growth stocks pay investors capital gains.

Value stocks serve as a flight to safety in bear markets, growth stocks are vehicles for speculation in bull markets.

Value stocks offer an excellent risk/reward trade-off when entering, while growth stocks offer excellent returns when exiting profitably.

The stocks that investors and traders put on their watch lists or in their portfolios must align with their own beliefs about the market. Your entries and exits using these stocks must be done in the context of a complete market methodology that has an advantage.

The risk of buying value or growth stocks depends on the entry price and how far it is from intrinsic value.

Deep value stocks are at risk of potentially going bankrupt and going to zero if they are not financially solvent and have enough income to service debt or are able to raise money by issuing bonds. The risk with a value stock lies in the price paid versus the true value of the company.

Growth stocks can become highly speculative with valuations well in excess of the company’s rational future value or future earnings projections. If a growth stock with a high price-to-earnings (P/E) ratio disappoints when the company reports its quarterly earnings, the price can fall 10% to 20% or more in one day. Growth stocks can also fall 50% to 90% in price as the market realizes it will never grow as previously expected. This usually happens in a bear market when speculation in growth stocks ends. The risk of a growth stock lies in the price paid compared to the company’s true future potential growth.

Value vs Growth Stock Performance Chart

Below is a comparison between Vanguard Value Index Fund ETF ticker VTV (Portfolio A) and Vanguard Growth Index Fund ETF ticker VUG (Portfolio B) in chart and data example from 2005 to 2022.

Value outperformed growth early in this period, then both returns have remained similar for years. In the last six years, before the recent correction, growth stocks have outperformed returns by 100 percent.

Performance chart between value and growth stocks

Performance chart between value and growth stocks

Diagrams courtesy of ETReplay.com

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