Stock Market: Chasing Value Versus Growth

 

Many opinions have been voiced about the benefit of investing in value versus investing in growth.

Proponents of each investment style insist that their method is superior to the other.

I believe that each one has its own merit. Being an advocate for value investing, let me make the case for value investing.

First, value investors buy companies in a mature industry. That said, it is easier to predict the earnings of such a company.

That is why I lean towards investing in value. I am in favor of reducing risk rather than chasing return.

Anyone can estimate that a small biotech company A will make X amount of profit after several years.

But, if your prediction is not accurate, how do you determine the fair value of common shares?

Your valuation will be out of control. Diseases come and go. Technology fades and fades.

For some, it might defy common sense, but I prefer a low or no growth industry.

Another benefit of investing in value stocks is that you can get a decent dividend yield from companies.

They are growing less, and management feels they don't need all of those profits to finance expansion.

As a result, they propose the payment of dividends to shareholders. This helps reduce risk.

That being said, I believe that growth stocks will return higher than value stocks.

No, I don't mean that you can profit handsomely by buying expensive stocks. Of course, you should buy it at a reasonable price.

You should not overpay for any stocks, including growth stocks. Growth stocks are companies that are growing or are expected to grow rapidly in the future.

Is advertising a growing industry? Yes, but it is not growing much. How about pay-per-search or pay-per-call advertising?

Oh yeah. If you invest in these types of companies, you are investing in growth stocks. These new forms of advertising represent less than 5% share of the total advertising budget.

Can your participation grow? You gamble.

Just as television gets a share of the advertising pie, pay-per-click advertising will get a larger share if it is profitable for advertisers.

We can say that the investment in value has less return for assuming a minimum risk. The growing stock, on the other hand, takes a higher risk to get a higher return.

That's fine. However, there is another type of investment that will burn your pocket. Many investors engage in a style of investing that earns little reward while taking great risk!

Buying stocks at any price is an example. Don't misunderstand growth stocks by buying at any price. It is just plain silly.

There are calculations and predictions involved in buying common stocks.

Determine its fair value and decide if you want to invest in a stock based on the risk / reward it offers.