Finnovationz - December-27-2018
Growth investing and value investing are two fundamental approaches or styles. We have already seen value investing, so now we will focus on growth investing & understand the difference between the two.
Growth investing consists of identifying stocks that have demonstrated a track record of high growth over the previous few years, compared to the market, and are furthermore expected to continue this earning growth in the coming future. Growth investors are looking for businesses that they believe will experience faster than average growth as measured by revenues, earnings, or cash flow. Even though the stocks might be expensive, growth investors believe that growth investment pays off in the long run.
For example, If a company has an excellent performance record & price of the stock has gone up year-on-year over 4-5 years then that stock could be a target for growth investors.
Thomas Rowe Price Jr, also known as "the father of growth investing" is well known for defining and promoting growth investing through his company T. Rowe Price. Mr. Price believed that investors could earn superior returns by investing in well-managed companies in fertile fields whose earnings could be expected to grow faster than inflation and the overall economy. Philip Fisher played a big role in shaping this investment style, his book "Common Stocks and Uncommon Profits" is still a reference for identifying growth companies.
Value investing is all about buying a fundamentally good stock at discount price i.e, buying a company for a market price below the intrinsic value of the business, whereas growth investing is all about buying a company with a track record of high growth over the previous few years at a higher price. Growth stocks must have Strong Historical Earnings Growth with strong fundamentals. There is no absolute formula for growth investing, it requires some individual interpretation & analysis.
Most of the companies which fall under "Growth Investing" are Technology and Healthcare Stocks, however, there are some unique companies from other sectors too. People who invest in Growth companies accept that there is a huge risk & no guarantee that their investment will be returned. The main issue with growth investing is the fear you are buying at the top of the growth curve. Growth investing requires a greater risk when compared to value investing & longer time horizon.
Almost every growth-oriented company is more likely to reinvest profits in expansion projects or acquisitions, rather than use them to pay out dividends to shareholders. Hence, almost all growth companies do not pay out dividends to shareholders. Growth investors are probably not too concerned with getting the dividend, they tend to receive returns from future capital appreciation.
Some investors think that "growth investing" contrasts value investing. However, Warren Buffett has stated that there is no theoretical difference between the concepts of value and growth as growth is always a component in the calculation of value.