Value or Growth?
What Kind of Investor Are You?
There are lots of ways to make money in stock markets. Lots of ways to lose money, too, especially if you don’t have an investment strategy. If your wingin’ it in the market, you’re going to get beat – and beat bad.
If you don’t know investment basics – just the basics – and if you don’t understand key barometers of market change – again, just the basics – you’re fighting Ali in his prime with one hand tied behind your back.
A smart investor knows what s/he is doing. A gambler puts the whole bankroll on a penny stock, gets wiped out and can’t understand why. I’ll tell you why. Because there’s a world of difference between gambling in the markets and investing in markets. And the difference, ultimately, leads to making money or going bust. The road to market riches is littered with the dried bones of gamblers who let it all ride on the dot bomb bubble of the 90s.
Market trends come and go. For a while, we were all investing in Europe. Then bio-tech came along and everybody was going to make a killing on genetic meds. Who knew it would take 20 years for product to make it through the pharma pipeline?
And who didn’t take a ride on the Internet carousel of the 90s? Chances are, if you had the cash you had back in ’99 you could retire. But three years of market retrenching and you’re still about where you were eight years ago.
The key to market success isn’t following the herd. The key to success, and financial freedom, is to devise an investment strategy that suits your aversion to risk, your time horizon (when do you need the dough) and your investment style.
Broadly speaking, there are two basic investment styles with hundreds of variations on the themes. The first is value investing. The second is growth investing. Both have their pros and cons and knowing these positives and negatives will better prepare you to make your own investment decisions.
An aside: there is risk in both value and growth investing, and based on my experience, the risk is about the same for both. However, there are advantages and disadvantages to value and growth investing.
Growth Investing
Confident Trader employs both growth and value investments to create portfolio ballast, and even though the CT Portfolio is comprised of micro- and small-caps, there’s both growth and value opportunities even in this smaller trading universe.
Growth investors look for new companies, start-ups, businesses with Unique Selling Positions (UPS) – the hot shots of tomorrow. Hey, remember, back in the 50s you could buy a share of IBM for $4.00. In ’82, you could have picked up Wendy’s at $5.00.
Why? Because the companies were young. They had no track record. They were up against stiff competition (Wendy’s vs. McDonalds? Total blowout, right?) Wrong. Wendy’s shares have appreciated nicely over the years and if you’d bought in at $5.00, you could retire now.
Growth investors study the prospectus, the competition, management and the companies plans going forward. Did anyone think that Starbucks would become ubiquitous? No. But we all thought online Petco would hit a home run. Man, how can so many people be so wrong so often.
Growth investors seek out young companies – micro-caps and small-caps – that have bright futures. And that requires reading the prospectus and keeping up on company news.
Growth investing is for the long term, despite what all those day traders tell you. Find the right company at a value buy-in, take a position and hold on for the ride. Some of the companies in the CT Portfolio have been staples for three or four years – and still growing.
Value Investing
Like things on sale? That’s value investing.
Stocks, for a variety of reasons, fall in and out of favor with market movers – the big institutional traders. So, a bad write-up in the WSJ can send a per share price plummeting even though the stock is every bit as sound as it was the day before. That’s a stock you want to buy.
Value investors look for companies that have seen success, seen that success diminish (due to everything from too many recalls to a CEO who’s brought in as a “fixer”) and buy these dogs cheap. It’s a form of contrarian investing. When everyone is buying, you be a seller and when the herd is selling, buy up good companies at steep discounts.
Again, buy companies with established credentials, a sales history of success and a price-earnings ration (P/E) below the market average. These tend to be stodgy stocks – insurers with over-sized risk during hurricane season, manufacturers involved in patent disputes or companies that have even filed for bankruptcy but are expected to make a comeback somewhere down the line.
Moderation in All Things
When creating your own portfolio of micros and small caps, select companies that have growth potential but also companies that have fallen out of favor. For example, Borg-Warner is hardly a micro but it’s been in the CT Portfolio for a while because it’s a sound company, selling high-quality products in an expanding market – the equation for success.
So, even when buying small-caps, look for the balance between value and growth – the companies with name recognition and low P/Es, and the firebrand startups with incalculable P/Es.
With this kind of balanced portfolio, you’re good to go whichever the financial winds may blow.
Value or Growth Investing: A Balance Works Best
