The Difference Between Growth Investing & Value Investing Explained

Written by Chris Draughon

I want to see you achieve your financial goals so I spend my time making the complicated things simple. As the Director of Financial Planning I help our clients identify their most important financial goals and develop paths to get them there on time with room to spare.

April 20, 2015


The Difference Between Growth Investing & Value Investing Explained-media-1

We get that you’re expecting to see your money grow when you invest it. Investing requires careful planning, and your return on investment will depend on the approach you take, the investments in your portfolio, and the overall health of the market.

Both growth investing and value investing have been successful strategies for seeing a good return on investment. While our financial advisors will guide you through which option is the best for you, based on your specific goals, it helps to have an overview and understand the strengths and weaknesses of each strategy.

Growth Investing

Growth investing focuses on companies that analysts predict will have faster-than-average growth. If this strategy is chosen, advisors will look at the rate of growth a company has had and identify the risk involved with the investment. Some, like speculative investments, come with a much higher risk.

The following should be considered about potential companies:

  • Return on Equity (How Efficiently the Company Can Make a Profit)

  • If There’s an Increase in Earnings per Share, and the Legitimacy of the Increase

  • Projected Earnings

Examples of growth investing companies include:

  • Small-Cap Stocks, or Companies with Capitalization Between $300 Million to $2 Billion

  • Technology and Healthcare Companies

Growth investing does come with higher risk than other investment options. However, there is also potential for significant long-term gains. Growth investing tends to see the best results when overall stock prices are rising.

Value Investing

Value investing involves buying stocks that are no longer popular due to investor irrationality. This can be due to a poor quarterly report or some external event.

The following needs to be considered in regards to value investing:

  • Counting on the Irrationality Being Short-Term

  • Determining that the Real Market Value is Significantly Higher

  • Figuring out the Intrinsic Value

  • Calculating the Margin of Safety

While less risky than growth investing, value investing does have some inherent risks. For example, the market could have correctly priced the stock, or the intrinsic value may be hard to determine. Still, value investing tends to bring higher dividend yields.

Are There Portfolios that Have Both?

Diversified portfolios offer both growth and value investing options. Managers will often use a strategy called “Growth at a Reasonable Price” and look at price-to-sales, price-to-earnings, and price-to-growth ratios to determine the best picks.

Let Us Help You Reach Your Investing Goals

First Coast Wealth Advisors is happy to help you with growth or value investing. Our professional advisors listen to your investing goals and you develop a plan that helps you meet those goals. Contact us today to discuss the investment strategy that will work for you.