Value investing vs growth investing: All you need to know

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Value and growth are the two sides of the same coin when it comes to stock investment, however it the approach and methodology is polar opposite when it comes to choosing. Before we begin with the comparison let us get to know what exactly is the terminology pertaining to value as well as growth.

Value stocks are just like finding the next superstar in the stock market. Every company is striving to be better than the other, and often every investor opts for the most successful stock, even when its valuations are sky high. Not that the most successful stock are all of sudden, going to be loss making, however the return on investment may not be optimum when compared to stocks chosen via value investment strategy. Value investment strategy pertains to careful study of stocks and its peer companies and evaluate the best stock on parameters such as price to earning ratio, price to book value ratio, lower debt or optimum debt to equity ratio, return on equity, return on capital employed, five years rate of sales and net profit growth, etc.

The list of parameters is unending, however deeper the study, higher the chances of better returns on investment. Apart from the parameters, some additional criteria such as industry trend, economic situation, Beta levels of stock, business nature, promoter’s parentage, etc, are also brought to the table. After such swashbuckling screening, the outcome of the stock is such that expectation in terms of rate of return is sky high. Such expectations are not unrealistic because of a) These stock contains huge potential and b) are available at peanuts value. In a layman’s language or may we say in cricketing terms, Value investing is similar to finding the next Suryakumar Yadav, who has enormous potential and is currently unknown to many.

Growth stocks are those stocks which may not be fundamentally strong or available at cheaper rate, however they posses such enormous growth potential, that investors get attracted even if it means paying more than its worth.

Some of the common symptoms are as follows:

Low dividend payout, meaning whatever the companies earn is immediately reinvested, giving little to no room for sharing profit.

Industry in which such companies operate is booming or is in the news because of want of certain products. For example in Covid era, pharmaceutical stocks especially those with covid-19 medicine or drug manufacturing abilities were outperforming every indices on this planet.

Volatility is synonym to growth stocks, that means their every move is represented in their share value. When they rise, the rise is gigantic and similar when they fall.

Very little regards to economic conditions, since these stocks are in the league of their own. Therefore irrespective of the economic scenario, these stocks will perform crisply, without any interventions.

Comparison

None of these strategies are future-proof or provide guaranteed returns. Many investors will argue that value stocks are backed with in-depth analysis of company’s fundamentals and therefore validly claim their current price, whereas growth stocks are mere impulsive shootout of stock prices which may not necessarily determine their true worth. On the other side growth followers may argue that these are the stock where every investor in some point of time turn to in order to safeguard themselves (hedge) from the repercussions of unstable economy. On a neutral note, both the strategies are effective if utilised in a proper manner.

Value stocks are backed by in-depth study of not just company’s financials, but also of all other important parameters, wherein researchers feel more comfortable to make investment or recommend. However in-spite of such study, there are often examples wherein growth stocks outperform value stocks. While there are also examples where in value stock have beaten growth stock by some margin for example Eclerx services and Page industries in April 2020. To cover in points growth can give you advantages in above points however value can give you following:

Stability

When stock is research-backed, it is bound to perform some or the other time unless something much more impactful is stopping it or degrading it.

Dodge traps by choosing value over growth, meaning you pay for what is worth and not something that crushes every economic phenomenon.

Dividend as an extra money over and above capital appreciation, as value stocks often posses high dividend payout and yet, manages investment or capital expenditure from internal sources due to huge cash balances.

Double edged sword, if value is combined with growth, it can give you lethal returns however growth stock may not necessarily be well researched stock hence may carry the cloud of doubt and fear with it.

As stated there is no absolute or clear-cut way to success when it comes to growth vs value. To narrow it down, if the economy is supportive it may be worth to try growth stocks, while when the economy is unhelpful, it may be wise to invest in value stocks. Therefore, a lot depends upon economic situation but at the same time, it may not be wise just to stick with one and only one approach, because flexibility is must in stock investment.