Growth and Value Investing are both around a long time as an 'investment strategy', and there are compelling rationale for investing in either, there are many fans of both, yet there is also quite a lot of regular investors that have no real familiarity with either. We aim to fix that even if ever-so-slightly in this episode. We will endeavor to explain a few key things about this 'earth-moving' topic......!
1) What is Value Investing?
2) What is Growth Investing?
3) Who does either or both?
4) Which has given greatest level of return? (that's all anyone really cares about right!?)
5) Which one should I do??
Before we get into the nitty-gritty however I wish to let you know that I am thrilled that you are reading this, you obviously have an interest in your own finances and in making some good decisions when it comes to your money, which I admire greatly. I would personally be very thankful if you would tell a friend about what we are trying to do here at Informed Decisions, who knows, it might help them help themselves! Thanks.
What Is Value Investing?
The clue is in the title with this one, this is all about seeking companies that offer 'value' at the price per share. A share would essentially be 'cheap' to buy when the financial-health of the company is taken into account. The share price won't reflect the financial fundamentals of the company, so essentially an investor is looking for a bit of a bargain before the rest of the investment world has figured it out! Value investing is apparently going through a 'dry spell' at the moment with many value investment firms stating that the opportunities are harder and harder to come-by.
Value Investing generally takes a more long-term view to the future growth of a company. A Value Investor will be in it for the up-side that will (hopefully) happen as the company grows in popularity, realises it's potential, and the share price rises over time. These things tend not to happen over-night and so a Value Investor won't be trying to double her money in the space of a few months! Another aspect of a suitable 'Value' company can often be that the company will pay dividends (an income as a % of the value of the shares held) to the investor or fund, which can only sweeten the deal for an accumulating value fund.
These types of companies tend to be financially very sound, well run, reputable and established. They have very prudent systems and management in place but just are going a little cheaper as their potential may not have been spotted by the rest of the investing universe....they do exist, finding them can be the tricky thing for individual or institutional investors.
Benjamin Graham is said to be one of the investing greats who formulated Value Investing as a specific means to investing. Graham (who died in the 1970's!). In his now legendary book 'The Intelligent Investor' he begins at the basics and in doing so defines the difference between investing and speculation which I feel might appeal to you.................'An Investment Operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative'. It is slightly off-piste of our topic here but irrespective of whether you are thinking of Value Investing or Growth Investing the over-arching premise should surely be the safety of principal and an adequate return, right!?
What Is Growth Investing?
An investor who is going hard for Growth Investing aims to get on the back of a bucking-bronco a company that is about to take-off! She will be striving to get invested in a company that will have huge growth in profit, revenue and share price, typically over a shorter period of time than the Value Investor. These companies tend to be on the verge of a major approach or strategy or indeed may be new companies entering the market.
In today's world Start-Ups are very-much in vogue, an investor in a new small tech company offering a potentially huge App or technology could be considered a 'Growth Investing' opportunity. The people behind the company may be surviving on beans, sleeping 5 hours per week and taking absolutely no income out of the business, every cent is being re-invested in growing the company and hitting the jack-pot. You can therefore gather that dividends are not likely from a company in this space, they are focused on quick growth only.
You have no doubt already recognised that the level of volatility involved in owning a share of a company like this tends to be considerably higher than in owning a company of the 'Value' variety.....they can often not pay-off, not achieve the growth anticipated and indeed often go bust entirely given their 'go big or go home' philosophy! It is not to say that they are all rodeo-riding lunatics however they have a more aggressive/bullish approach to growing their business, which is matched by the investment philosophy of the investor who buys a share!
Who Does Either, Or Both?
There are many 'investment managers' who might take either a value or a growth approach to investing. One really well established and prominent Value Investor is Guy Spiers who has managed the Aquamarine Fund in the US since mid 90's. Spiers took inspiration from Warren Buffett and approaches his investment decisions very-much from a 'Value Investing' perspective. He has delivered consistently above-average returns for investors in his fund (who queue-up to invest!) since then. His fund, which he and only he makes all decisions has delivered apparently 2.5% more per year than the S&P since it launched in 1997, which is a respectable bar to hit, over a decent period of time. His book 'The Education Of A Value Investor' is a thoroughly interesting read not just about investing but about life in general, and what he has learned from others.
There are funds available to investors in Ireland that would have a slant to either Value or Growth. If you look hard enough you will find them available through most of the larger investment/insurance companies. There are also many many which offer a blend of both strategies, with a focus on neither!
Which Give Greatest Level Of Return!?
We all want to know which investment lives up the most to Graham's definition, as in which will preserve our capital and deliver a good return over the long run for us! The answer to the question of whether Growth or Value offers the greatest return is sort of impossible to answer in reality. There are so many different investment managers offering either type of strategy, and in very different markets for very different periods of time. The common take is that Value funds are struggling in recent years as it becomes harder to find the under-priced companies, but also that the low interest rates across most economies make it more appealing to opt for Growth Funds which supposedly offer greater future cashflows/profits.
We took a look at one Investment Management firm who offers both types of funds to investors, who have data available over the same periods of time, which allows us to draw some conclusions (however unscientific it may be!) about the returns of both over recent periods of time with this one firm. In the interest of non-promotion we are keeping this firm anonymous!
10 Year Annual Return: 10.1%
5 Year Annual Return: 15.7%
3 Year Annual Return: 10.9%
10 Year Annual Return: 9.6%
5 Year Annual Return: 13.69%
3 Year Annual Return: 9.2%
We can clearly see that on each of these (relatively short periods) that the Growth has delivered greater returns. However to say that this data proves one is 'better' than the other would be just plain wrong! What it does point to is the fact that there is not a whole pile of difference between the two funds from this particular investment firm. And what it also points to is that unwavering fact that over the long term equity investment whether it is Value or Growth has offered solid returns for investors.
So, Which One Should I Do!?
The last sentence of the last paragraph points in the direction of one of our core philosophies here when it comes to investing, and that is that 'Volatility is not risk and temporary decline is not loss when invested in a well diversified portfolio of equities', and that stands to logic irrespective of whether it is a Value-fund or a Growth fund. And speaking of diversification it would also stand to logic that in pursuit of diversification an investor who seeks to preserve capital and achieve return as Benjamin Graham suggests, may well benefit from having a foot in both stirrups!
Thanks for reading.
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