Tuesday, October 02, 2007

Value Investing & Growth Investing

When it comes to investment strategy, there 2 types of investment strategies: value investing and growth investing.

It is always difficult for the fundamental investor to decide whether to be a value or growth investor. Value investing is concerned with the current price level and fair price of a stock, while growth investing is more focused on potential earnings growth of company. In order words, value investing is to buy low, sell high and growth investing is to buy high, sell even higher.

Value investors are always earlier buyers of stocks. They buy based on the belief that the market has misread the real value of the company (see A in the chart). At that moment, the future prospects of the company may still uncertain. There may or may not be an increase in earnings.

In contrast, growth investors will come in the early recovery stages of a company's fundamental. At that point in time, the stock's price would have already moved higher from its recent low (see B in the chart). Value investors will usually start to feel uncomfortable with the price level and sell the stock even though the company's fundamentals have recovered, while growth investors will buy the stock in the belief that they are buying high to sell even higher (see C in the chart). Growth investors believe that it would be safer to buy stocks when the fundamentals have shown definite signs of recovery, and will sell higher when the prices increase as a result of further improvement in the companies' fundamentals.

So which strategy is better? Are you a value investors or growth investor? Can I say normal investors practice value investing strategy and professional investors practice growth investing strategy?


Anonymous said...

Nice article, thanks for sharing. Was wandering where you get this information??

ChampDog said...

Get this information from a lot of places including the internet, the magazines and some financial books. Anyway, I think majority of us are "Value Investor'. Who dare to buy the sell when it is high? Will you?

footiam said...

Learn something new! Thanks!

Anonymous said...

You're kidding right?

Mt. said...

I buy whenever I find a stock that is priced below what it is worth or what it could be worth in future. Not sure which category I am in ... its always easy to look 'back' the chart and name things, but they are irrelevant if we cann't use it to predict future outcome.

ChampDog said...

My assumption on majority of us are "Value Investor" may wrong. I think they key here is not to buy low and sell high or buy high, sell even higher for growth investor.

The key here is "Value Investors" buy stock for less than its worth. If we buy a stock because we think the stock price is under priced, we're a value investor. However, if we buy a stock because of its potential growth, we're growth investor.

It triggers me another question from the comments by Mike. What if a stock is under priced and has potential growth? Isn't this is the best investment strategy? Why don't we wait for a potential growth company stock price to be under valued? We then buy low and sell even higher. This looks like the best investment strategy. Don’t you think so?

Anyway, I’m just trying to learn some theory. I'm just a newbie in stock investment. Stock investment for me is just too risky for me at least still true for now. It is just too many of unpredictable stuff that out of my control. Therefore, I only invested the small amount of money in stock.

Peky said...

From what I know, value investors are named such because they put priority/emphasis on the price of a stock more than the growth of the stock. They are more willing to sacrifice some earnings growth for the sake of cheaper stocks. Reason being, they are not willing to take the risk of growth in expense of the money.

Whereas for growth investors, they are more willing to sacrifice the cost with the potentials for earning from the growth. Meaning to say, even if required to pay higher price, so long as the analysis (so to speak) and the confidence is there..they'll go for it.

Some of the common ratios used by investors are the P/E and the PBV ratios. However, as usual, theories are theories. None of the ratios can be taken as an entity to decision making. :D hehe...

This link has something about value & growth investors..

yy said...

value investor

buying the stock as shareholder when the company stock are ...

1)high eps but low pe
2)trust the company management team
3)potential growth

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