Treavor Dodsworth CFP®, CPA, CKA®
#153 - Value vs. Growth
There are many different ideologies in investing. One that you may have seen in the headlines or heard me mention in the past is value vs. growth.
Before I explain value vs. growth, remember that when you are buying a stock you are buying ownership of a company. Therefore the cost of what you pay should reflect the amount of ownership you receive and the quality of the actual company.
Value stocks are generally seen as companies that are on sale when you look at the earnings they produce or the assets they have. For example, let’s assume both Company A and Company B have earnings of $100mil a year and each stock represents the same percentage of ownership. If you only have to pay $10 for a stock of Company A but have to pay $20 for a stock of Company B then Company A could be considered to be trading at a value comparatively. You have to pay half the price for a company that generated the same earnings.
So why would anyone pay twice as much for Company B when the company has the same earnings as Company A? There could be several reasons. Company B may be coming out with a new product or maybe while they currently have the same earnings as Company B it may be that Company B’s earnings have been increasing at a much faster rate. These factors (among others) could make Company B be considered a growth stock.
While I do maintain broad diversification (having value and growth), I do tilt slightly towards value. Intuitively, value makes more sense to me. Growth presumes about the future to some degree (i.e. the earnings will get to this once they release this product) where value seems like you are buying the known benefit (i.e. I pay less to get the same amount of earnings).
Value vs. growth is just one of a few of the different ideologies in investing. This article is admittedly an oversimplification and there is much deeper research I could share about value and growth. Feel free to reply and let me know if you want to receive it.
Thank you for reading!