Investing is very rewarding. In fact, it is believed to be one or if not the best way to accumulate wealth. However, investing, though as simple as it sounds, isn’t easy. There are several factors to be considered before investing such as time frame, timing, personal and investment goals, one’s personality, risk tolerance, etc. One very important thing to consider in investing are the types of investing. There are generally two very known investing types namely growth investment and value investment. Though both investments appreciate in time, both approach investing differently. Several people prefer one over the other as both have advantages and disadvantages.
Growth investing, as the name suggests, is all about the growth of a particular investment’s worth. Investors who use this strategy seek companies, stocks, and investments that have good growth potential. Some things to consider in growth investing are company or stock forecast, future plans and developments, management roster, and financial reports. Reading financial reports and reviewing a certain company or stock’s plans are very important. An increasing financial report over the years suggest that a certain company or stock has been very consistent and may continue to do so. The key in looking at a company or stock’s potential after seeing a consistent increase in earnings is to look at its future growth plans as well as its competitors and the sector that it belongs in. Everything should point at the same direction and that is up.
Value investing on the other hand is all about hunting stocks and companies that are undervalued. This is a more popular style of investing and this is the type that legendary investors such as Warren Buffet use. Value investing is more technical than growth investing as it may require more analysis and skills in picking stocks. The key in value investing is picking stocks that have very low intrinsic value. Intrinsic values are computed through given data such as earnings-per-share (EPS), price per share, and price to earnings ratio (P/E). Value investors believe that undervalued stocks will soon rise and hit their real values in time. In a good performing market, such book value is hit immediately, but in a poor performing market, it may take years.
The advantage of growth investing over value investing is that growth investing is much simpler to understand. Almost everything is given in a company’s financial statement while future plans are given on corporate disclosures. The disadvantage though is the possibility of picking overvalued stocks or companies. Companies that continues to surge may reach a point where they can no longer continue to go up.
The advantage of value investing over growth investing on the other hand is the fact that value investors get to pick much better and cheaper stocks and companies than growth investors may pick. The growth potential that value investors have compared to growth investors are better. However, the disadvantage that value investing brings is the effort and knowledge that it requires. It requires some skill, experience, and good forecast and analysis. There is also no fixed way on how to compute a company or stock’s intrinsic value thus, despite all the computation and data, value investors may still come up with the wrong decisions.