Is Investing for Growth Right for You?
You may have heard terms such as value investing and growth investing. Although both types of investing involve buying stocks and then selling them at a profit, there’s a big difference in the two investing techniques.
The difference between value and growth investing is an important distinction to be aware of, as it could help you figure out which type of investing suits you best.
Value investing places a premium on using company financial data and analytics to determine whether its current market price is lower than its value. Once this is assessed, investors will buy stock in a company with the expectation that the share price will eventually shift to represent the actual market value.
Growth investing takes a more holistic and macroscopic approach, focusing on large economic trends.
While a value investor might avoid investing in a company with higher share prices, a growth investor may buy the stock if the industry itself is showing growth.
How do you figure out which style of investing is right for you?
You might be a value investor if…
- You're a numbers-oriented investor. Is this a bad thing? Absolutely not. Many investors that take a numbers-oriented approach consider this a more reliable investment strategy.
- You choose stability over risk. Value investing is always considered a more stable investment strategy. If you follow this approach, you’ll purchase stock using a “margin of safety” that allows for small errors in the calculated value of a stock.
- By taking such a conservative approach, you minimize the risk of loss, as you ensure that you are buying stock that is significantly undervalued to begin with.
- You like to analyze historical trends. You might be thinking to yourself, “How else could anyone invest in a stock without analyzing historical data?” That's a valid point. However, growth investors use different strategies that we discuss below.
You might be a growth investor if…
- You follow technology trends in the news. Time and time again, the biggest growth stocks are related to the trends with the largest potential for rapid growth. Knowing which new form of technology is going to catch on will allow you to select a company that manufactures or supplies that technology. This is a recipe for success for any growth investor.
- You're a “big picture” kind of person. If you’re able to see the big economic picture regarding where our society is going and what's going to become important in the coming years, you may do just fine as a growth investor.
- Growth investors can perceive glaring needs in an industry and recognize when a company is providing a way to address those needs.
- For example, currently, there’s a growing trend towards green energy and environmental conservation. As a growth investor, you might see the value in investing in companies that provide sources of green energy such as turbines and water powered systems.
- You like big returns and dramatic growth. A value investor's potential for higher earnings is limited. This is mainly due to the fact that calculating the value of a stock and comparing it to the share price does not take into consideration a company's larger role in providing a much-needed service or product to the market at a particular point in time.
- Growth investors look for a company with the potential to meet a need that is not currently being met. If and when the demand for their products or services materializes, the value of the company can increase dramatically.
If you're still not sure whether value investing or investing for growth is right for you, it might not be a bad idea to follow the lead of a pretty savvy investor like Warren Buffet. Most people would consider him successful at what he does and nearly everyone heeds his advice.
Buffet recommends using a combination of these two investing approaches so that you can enjoy the benefits from each one. As with most things in life, moderation is the key to success.