Growth Investing v/s Value Investing - Which is Better? | ETMONEY

Growth and value represent the two dominant styles of investing and every investor often has a preference or leans on one of these styles. In this video, we shall go deeper into these two styles as we understand their differences from the perspective of their objectives, valuation metrics, and performance

Topics Covered:
00:00 Introduction
01:31 Investing Style
05:29 Valuation
08:07 Performance
11:15 ETMONEY Opinion

👉 INVESTING STYLE
Growth investing’s assertion is rather simple if the sales or EBITDA or earnings per share of a company is growing at an above-average rate then the stock price is likely to follow that same trajectory sooner rather than later. Investing in growth companies also comes with additional risk which makes these stocks pretty volatile. Investors have to carefully factor things like cyclicity or inorganic growth when identifying growth companies for suitable investments

A value investor is not really looking for those flashy companies that are breaking records or are promising to change the world. Instead these investors are keener to put their money behind the established, predictable companies in more mature industries

👉 VALUATION
A value investor’s interest in determining the right price to pay for a stock. They are bargain hunters and are keen to try different approaches to understand the true worth or the intrinsic worth of stock.

Now, one of the most basic valuation techniques used by value investors is to look at the price-earnings ratio or the PE multiple of the stock. Growth stocks generally have a high PE Ratio while value stocks tend to have a low PE Ratio

In addition to the PE ratio, there are many other metrics that show contrasting characteristics. For instance, growth stocks command a higher price when compared to their earnings, their book value, or their operational cashflows. And likewise, companies of value-oriented stocks offer a higher dividend payout and dividend yield as compared to growth companies. Growth stocks are more expensive. They have a high PE ratio, PB ratio which is all driven by the future potential that these stocks carry.

👉 PERFORMANCE
Both, the growth cycle and the value cycle, take turns in outperforming and underperforming the market. The growth and value stocks go through a meandering journey of relative overperformance and underperformance to each other. The gap in returns is pretty wide between the two investing strategies. What’s interesting to observe are the precise moments when the growth story turns to value and the value story goes back to growth. When the stock markets find themselves in a major and turbulent time there is a tendency for the market participants to switch from one strategy to the other

👉 ETMONEY OPINION
Growth and value investing represent two different styles of investing with their unique set of opportunities, objectives, companies, measurements, and drawbacks

From an investor’s perspective, one has three options to choose from
Option 1 - You can pick either of the two styles and stick with it.
With this, you need luck on your side as one doesn’t know how long these cycles will last

Option 2 - You can try picking out the style which is likely to outperform at a given time
But timing the market is excruciatingly difficult

Option 3 - Wherein an investor can own some growth stocks and also own some value stocks
This would mean holding some outperforming stocks and also holding some underperforming ones

Instead, they seek out hybrid strategies that look to apply the best characteristics from each approach. For example - GARP .. which when expanded comes to “Growth at a Reasonable Price” is a much-practiced investment approach that seeks to balance pure growth and pure valuation. Under this approach, investors look to investing in growing companies with solid fundamentals
that aren’t too expensive. These companies invariably turn out to be excellent investment vehicles that can offer a 10x to a 100x return in a few short years

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