Understanding Growth And Value Investing

Which Is Better: Growth Vs. Value Investing? There isn’t one answer. Growth stocks have visibly outperformed during the pandemic and can be more resilient during economic downturns than value stocks. Over the past decade, experienced investors will point to growth stocks as the better performers during the longest bull market. That is true.

Blended funds are appealing as they contain a mix of growth and value stocks available in one fund. Given the difficulty of pegging one investment style over the other, blended funds offer diversification and access to stocks of both approaches.

Characteristics of Growth Investing

The Positives

Growth stocks appeal to long-term investors who seek higher growth companies. The companies they represent are often leaders in the markets they serve. These stocks recognize the high-risk, high-reward nature of this investing approach. Buyers of these stocks seek companies that promise consistent high top and bottom-line growth in all economic conditions.

Amazon, A Prime Example Of A Growth Stock

Amazon is an excellent example of a successful company dominant in all of its businesses. As the largest global online retailer, Amazon has rapidly invested heavily in fast-growing businesses, notably subscription, cloud computing products, advertising, grocery, and healthcare.

Origins of Growth Investing

Thomas Rowe Price, (founder of T. Rowe Price) is known as “the father of growth investing.” As an early promoter of growth stocks, he believed that investors could earn superior returns by investing in well-managed companies.

Benchmarks For Growth Stocks

1. Companies have high revenue and earnings growth with a visible track record. In essence, investors anticipate that earnings growth will be forthcoming sometime in the foreseeable future. However, in recent years, investors have been willing to forego earnings growth in the near term as revenues ramp up at healthy levels.

The Negatives

Above-average valuations often price growth stocks for perfection. That means the company results that meet or miss expectations disappoint investors. As such, investors will more quickly dispose of their shares at any troubling signs.

Growth Funds and ETFs

Given their volatile, high-risk nature, an excellent way to invest in growth stocks is through growth mutual funds or ETFs. You can buy a basket of stocks in a range of market caps, from large caps to small caps.

As a counterpart to growth stocks, value stocks appeal to investors seeking well-managed good companies that pay dividends. A higher dividend yield helps value investors to be patient while waiting for the company to turn around. They are typically less risky and attractively priced below that of their peers and the broad market average.  These are “diamond in the rough” stocks.