Value Investing vs Growth or Momentum Investing
What are Value, Growth and Momentum Investment Strategies and Which is Best?
Value and growth or momentum investment strategies are quite different approches to stock-picking when investing in the stock-market used by different types of investors and traders, but what is the difference and which is best? I have used both methods and under different situations both can be effective, but I shall discuss here the pros and cons of each.
Value investing is exactly what it sounds like: picking shares based on their value; how cheap they are relative to other shares and the market (usually based on Fundamental Analysis - see below) perhaps because they pay high dividends. Growth investing is based on shares that have potential to grow or are growing. Momentum investing or trading is a kind of Growth investing based on the current upwards direction of the stock continuing. i.e. it has momentum. This is usually based on Technical Analysis (see below)
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What is Value Investing?
Value investing involves buying stocks and shares that you think are inexpensive compared to other stocks and to the market. To determine this you must do some maths to calculate ratios such as the PE (Price Earning ratio) the percentage yield (estimated looking forward and actual looking backwards) and various other indicators to determine if the dividend is likely to be paid. If a stock is cheap and there is no sinister reason for this, eventually the market will notice and the price will go up. If it doesn't you still receive a good healthy yield in the mean-time. For a full discussion of how to calculate the ratio and interpret the maths please see this article about Fundamental Analysis...
Value Investing Books
Growth and Momentum Investing/Trading
Growth investment involves stock-picking based on the perceived potential for a stock to increase in value: e.g. small-cap companies with growth potential or new products; companies with expansion potential or takeover/merger targets. Growth stock usually don't pay a large dividend so your profit will be mostly from capital gain rather than income, so you have to get the stock-picking right. If the price goes down there are no dividends to cushion the blow. The way to identify growth targets is to read to the financial pages and the company reports, but many people also use Technical Analysis or Charting to identify Momentum stocks: stocks that are going up and should keep going up in value. See this article on Technical Analysis to see the various methods involved
Animal instinct seems to favour momentum style investing. If you have ever been on safari you will know that if you meet a lion you should stand very still. If you run he will chase you and eat you. It would be easier for him to wander over and just eat you before you move, but he won't. The same is true of investing: most investors will chase shares that are moving up fast, which makes them move even faster. A low price share that isn't moving will be ignored. If you chase the fast moving shares you may make a lot of money very quickly or buy just before it crashes (sorry that's where my lion analogy breaks down - maybe that's when another lion eats your lunch) If, unlike the other "lions" you wander over to the stationary, uninteresting shares and eat them you get the same thing for less effort (i.e. money)
So Which is best: Value OR Growth Investing?
Of all of the world famous investors of all time, most have been Value Investors: Benjamin Graham was the inventor of modern value investing and was Warren Buffett's (the current best investor of all time) mentor and the British equivalent, Anthony Bolton or Fidelity Investments also follows a similar approach. Value investing perhaps requires more maths, but is still relatively easy to understand and over the very long term does tend to give positive results. Growth Trading is perhaps more fun, but can also be riskier.
Which is Best: Value of Growth Investing?
Which is Best: Value of Growth Investing?