Growth vs. Value Investing – Which investment strategy is better for long-term investors?

The two most prevalent types of investment are growth and value, which are radically different. Exposure to growth stocks has been proven crucial in the previous two decades due to the rise of new innovative firms.

What is “growth investing”?

• Growth investors choose stocks of firms with high potential for rapid revenue and profit expansion via compounding to maximize returns. The profits and prospects for a firm’s future earnings are the driving forces behind its stock price. A stock price that appeared pricey at the outset might seem relatively inexpensive in retrospect if profits climb substantially over three to five years. When a company can raise its profits by 25% or more, its stock price rises sharply.
• Investors with a growth mindset look for a company’s strengths in areas that will lead to increased profits. In the first place, a flourishing market is indicative of rising profits. Secondly, if the firm is a leader in its field and can improve its market share, it will see a rise in sales. Finally, profit growth is also impacted by a company’s margins.
• Margins may improve or remain consistent if pricing can be held steady or raised. Profits will rise if costs can be reduced or increased at a slower rate than revenue. Generally speaking, growth companies fetch a higher price than the market. If the firm can maintain its current profit growth rate for an extended period, this will be good. But if GDP decelerates more quickly than expected, expensive equities will feel the pinch.
• Typically, dividend investments are made with more established, successful businesses. Still, growing firms provide dividends, and the return on such investments may sometimes skyrocket. The goal of dividend growth investing is to identify stocks of firms with the potential to raise their dividend yield by a significant amount, resulting in a high return on investment.

What is value investing?

• Stocks that value investors think are selling at a discount to their true worth are purchased by value investors. Warren Buffett’s track record shows that these companies have the potential to provide extraordinary returns over the long run.
• Stocks trading at a discount to their true worth provide buyers a buffer against potential losses. Investors often look forward when a stock is in favor and its stock price is growing. If the stock price discounts too much growth, it could lead to catastrophic declines. In contrast, if a stock is selling at a discount, then it is unlikely that a modest setback would significantly impact the stock price.
• More recent schools of thought in investing, such as ESG and factor investing, have strong ties to the value investing school. Environmental, social, and governance (ESG) investors think about the impact these factors have on a stock’s price stability over time. Long-term stock outperformance is often attributed to a company’s fundamentals, which are the focus of factor investing.
• Through the lens of asset value, value investors seek companies trading at a discount on their true worth. The price-to-book ratio and the price-to-free cash flow are standard metrics of interest. The debt-to-equity ratio, the return on equity, and the dividend-paying capacity will also be considered.

Key differences: Growth stocks vs. value stocks

• Finding businesses with consistent annual revenue and profit growth is essential for growth investors. Companies in emerging markets with cutting-edge offerings may be expected to cut. The technology, consumer goods, and services industries are typical homes for fast-growing enterprises. Growth investment is often concerned with the narrative around a firm, even if the profit growth rate is the ultimate determinant of a company’s worth. Even if earnings ultimately establish value, investors place a far higher premium on stocks that are predicted to do well.
• If investors avoid a company or the market overreacting to poor news, it may result in a markdown for the stock. This may occur due to general economic conditions or internal difficulties within the firm. Typically, firms that trade as “value stocks” are either cyclical or have fallen out of favor with investors. As a result, they will often be considered dull businesses.
• The current low price of a stock is no guarantee of future growth for the underlying business. A stock is considered a solid value investment if it sells for less than the sum of its assets or less than its expected future earnings. The best investments are in companies that are either profitable or have access to valuable assets. The value of a firm may need to be unlocked via a restructuring or the sale of assets. Value investors often think about reorganizations and turnarounds.

Examples of popular growth and value stocks

• Popular high-growth stocks of the previous two decades include Apple, Google, Amazon, and Netflix. Companies like Apple and Google are examples of those that saw increases in both sales and profits. Despite being barely profitable, Amazon and Netflix have seen their share prices soar based on sales growth. Unfortunately, these stocks have experienced severe declines due to their thin margins.
• Stocks like Tesla’s tend to be driven more by investor sentiment than underlying company performance. Because of this, the previous several years have been filled with unprecedented instability. In recent years, top growth stocks have included Nvidia and Broadcom in the hardware sector and CRM and Shopify in the software sector.
• The Chinese technology and media industries have been among the most successful investment bets of the last decade. Companies like Tencent, Alibaba, and Baidu have profited from China’s rapid economic development and the difficulty that foreign competitors have had entering the Chinese market. These are technology companies trading on the stock market that, like their American counterparts, are engaged in AI and other cutting-edge, fast-growing industry sectors.
• Coca-Cola is an excellent illustration of a corporation that has delivered exceptional long-term value. About once every several years, the company’s stock price rises to an enticing level. However, the firm also has strong fundamentals over the long run, which should translate to rising profits.

• Procter & Gamble, J&J, and AT&T are a few examples of large-value companies performing well over the last decade. Despite Apple’s reputation as a growth stock, the company’s value has improved in recent years. Even though IBM was formerly considered a growth company, it is increasingly included in value portfolios. Intel and Cisco are two more well-known IT value stocks.
• Stocks in the healthcare and insurance industries are among the most stable investments. Even though they provide constant and predictable income, they are typically overlooked since their development is unremarkable. They may outperform the market for several years if acquired at a reasonable price. However, insurance and equities, generally viewed as safe long-term investments, expose Berkshire Hathaway to risk.
• Value stocks include financial institutions like JP Morgan and Citigroup. Though they often trade at favorable levels, they are vulnerable to market volatility and financial shocks.
• One of the industries that have fared the hardest over the last decade has been traditional mall and storefront retail. Many of these firms look to be in terminal decline, yet other retailers still have appeal to value investors. This is the riskier end of the value scale, where turnaround bets are common.

Pros and cons of growth investing

• The rewards of a long-term growth investment plan may be phenomenal. Money may be regularly redirected to the equities with the best growth potential. In principle, this is the most innovative approach to distributing funds. But, when it comes down to it, timing is everything.
• As a rule, a growth stock market bubble involves excessive speculation. This has the potential to be both beneficial and harmful. Before a stock bubble arises, it’s possible to invest in it and reap more significant returns than anticipated by riding the wave of investor enthusiasm. However, when a bubble collapses, prices may drop precipitously.
• High-value firms may fall sharply when growth stops and shares rerate, whereas growth equities tend to be more costly. As a result, there will be times when you must enter and exit a stock market trade ahead of other traders. Some stocks, like Amazon and Netflix, have required patient holding despite severe price drops.
• Investors seeking growth should be OK with uncertainty. However, it may take a lot of work to separate the actual development potential of a firm from the hoopla around the stock. You’ll require knowledge of the firms and the marketplaces in which they function, as well as the psychology of the market and the investing public.

Pros and cons of value investing

• If executed properly, value investments should provide moderate levels of volatility. The overall portfolio’s volatility may be tempered with the help of a well-managed value portfolio. Instead of relying on projections of future income, margins, and the state of the economy, value investors look at the available facts. As a result, there is less room for error in value investing since it is less susceptible to the impacts of hype and emotion.
• Finding good and cheap companies takes a lot of time and effort. There is always a good reason why equities are selling at a discount. To recognize investments worth making, you’ll need expertise in reading financial accounts and accounting. The best way to get an informational advantage may be to focus on a particular field of work. Investing in equities based on value implies taking a contrarian stance. It would help if you felt comfortable making purchases when most people are selling and taking the opposite stance.
• When making valuable investments in businesses, the horizon often needs to be clarified. A stock’s undervaluation isn’t always a precursor of a price rise in the coming months or even years. There are times when value investment performs very well and others when it performs poorly—because of this, having a great deal of patience is essential.

Which investment strategy is better: growth or value?

• There are two factors to consider when deciding which investing strategy is ideal. To begin, one of these strategies is more intuitive than the other. Risk aversion is a common trait among value investors, who instead focus on a firm’s financial statements. On the other hand, growth investors care more about market sentiment, technological innovation, and consumer trends as a group. Those who invest in a company’s growth must have faith in the durability of a trend and the firm’s capacity for future innovation.
• For another, even though one method seems to be the best, that may only be the case sometimes. It was generally agreed upon until relatively recently that value investment would prove superior over the long run. Value stocks, however, have outperformed growth stocks since 2008. This makes the long-term statistics murkier. This poor showing may be attributed partly to the emergence of the digital economy and historically low-interest rates. The future performance of growth stocks is unknown.

How investing in growth and investing in value may complement one another

• It’s up for debate whether growth investment or value investment is the superior approach. However, we may be pretty sure that they can complement one another. For example, it is expected that a value investing approach would have lower volatility than a growth investment strategy. Investing in growth companies, on the other hand, may be profitable since these companies provide exposure to growing markets and industries.
• Both methods may be used to invest in individual stocks in addition to a broader mutual fund or ETF strategy. The core/satellite investment strategy entails earning beta with passive investment products and alpha with somewhat riskier assets. Because of this, both value and growth stocks may be employed to boost results.
• Though value investing is less volatile, both approaches are vulnerable to temporary setbacks. This means that hedging measures must be used in conjunction with stock-choosing tactics to lower portfolio risk. Further volatility reduction is possible with the help of short-selling hedge funds.

Catana Capital’s Data Intelligence Fund

The Data Intelligence Fund at Catana Capital is an example of a long/short hedge fund. That implies its results are less correlated with the market average than growth companies or value stocks. In addition, the fund employs real-time information to gauge market sentiment, diminishing its association with traditional long-term investment plans.

Conclusion: Diversify your portfolio with growth stocks and value stocks.

Both value investing and growth investing are successful over time. While all methods and styles have their advantages and disadvantages, it is clear that no one is perfect. The two approaches work best in tandem or as part of a broader portfolio. Both methods call for some groundwork in the field. It might be beneficial to hone one technique over another if that’s the case. If not, it’s preferable to put your money into mutual funds, ETFs, or hedge funds specializing in that area.