Growth and Value – Two Sides of the Same Coin?

In: Business and Management

Submitted By jsurges
Words 1046
Pages 5
- “The central principle of investment is to go contrary to the general opinion on the grounds that if everyone agreed about its merit, the investment is inevitably too dear, and therefore unattractive.” – John Maynard Keynes

Many money managers feel they must distinguish themselves as either “growth” or “value” investors. While an apparently benign distinction, this simple act can have unintended consequences. This article will address conventional definitions of growth and value and then look to the market oracles for a dose of worldly wisdom.

Value investing: The strategy of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued.

Growth Investing: A strategy whereby an investor seeks out stocks with what they deem good growth potential. In most cases a growth stock is defined as a company whose earnings are expected to grow at an above-average rate compared to its industry or the overall market.
(Definitions taken from Investopedia)

The difference between the two approaches might best be illustrated by an example at the far end of the value and growth spectrums:

Take two companies with differing future prospects: Company A and Company B.

Company A: Analysts love this company, and rightly so: this company has emerged as a monopoly in a new industry. Profits grow at a rate of 40% a year. In industry parlance, company A is a ‘growth stock’

Company B: This is a poor company in a poor industry. Some years it makes losses, other year’s miniscule profits. It’s barely surviving. Nevertheless it does have one redeeming feature; cash on the balance sheet makes up a significant proportion of market capitalization. This holds possibilities as a pure value investment.

At this point we might be asking ourselves which is the better investment:…...

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