Growth Versus Value Investing

Most financial experts categorize investment options into either growth or value. However, investing is a little more complicated than that since some options have elements of both value and growth. Nevertheless, there are several crucial differences between value and growth that can help you build your portfolio. But first, let us define these two terminologies. In value investing, the stocks present an opportunity to buy shares below their actual value. Value companies are usually more stable and have tons of historical data to back them up; a great example of a current value stock is Ford motors. On the other hand, growth is all about stocks that exhibit above-average revenue and earnings growth potential. For example, Amazon. 

Cigar Butt Investing

Warren Buffett built his empire ignoring the hot speculative trends and focusing on strong companies the market had failed to appreciate fully. But before all that, Buffett was Benjamin Graham’s student during his time at Columbia Business School. Graham practically introduced Buffet to value investing, a methodology that meant digging up companies with stock prices that were unquestionably worth more than what you would normally pay for. Buffett later called these investment opportunities “cigar butts.” His analogy was that most people would pay little attention to a cigar butt lying on the sidewalk. But for a smart investor, if you can pay close to nothing for a stock, you might still get a few puffs out of them. 

However, Buffet later tweaked his approach to start looking around for unsmoked discarded cigars. In this strategy, he did deep research on companies with great value, say exceptional management styles, that traded at below their intrinsic value.

Which is Better?

When it comes to comparing the better alternative between value and growth, decisions are often evaluated based on time horizon, volatility, and risk. For example, value stocks are typically assumed to have a lower level of risk and volatility since they are often found in larger, more established companies. Plus, the fact that they may still offer some capital growth and pay dividends is welcome news for most investors. In contrast, growth stocks prefer to reinvest earnings back into the company to finance expansion efforts. Nonetheless, in general, growth stocks possess the greatest risk and reward for investors when done right.

All in all, the decision to invest in growth or value stocks comes down to your preference, risk tolerance, investment goals, and time frame. Furthermore, the performance of growth and value stocks sometimes largely depends on the point of entry into the market.

Listen to learn more about Growth vs. Value—Titanic Struggle or False Narrative?

Links and Resources

Security Analysis by Benjamin Graham
The Intelligent Investor by Benjamin Graham
Margin of Safety by Seth Klarman