Growth versus value investing

Many stock market investors are prone to face the dilemma: ‘Should I invest ‘growth’ stocks or should I put my money in ‘value’ stocks.’ This conundrum is quite common and it is necessary to understand the two approaches in order to resolve it. 

Basically, growth investing is investing in companies that are expected to grow faster than their peers in the industry in terms of their revenues, profits, cash flows, etc. Since the ultimate objective is to grow, these companies typically reinvest their profits in the expansion of their business through capacity expansion, acquisitions of other firms, expansion and diversification of their markets and expansion of their product range. Since the priority is expansion, these companies do not declare high dividends or may even not declare any dividend as they aim to plough back the profits in expanding the business and growing bigger in size and scale.

The stocks of growth companies command a high premium in the market as they offer high potential for further growth. But the higher potential return makes these companies riskier as the investments made by the company in organic and inorganic expansion may not yield the desired results. Hence, growth stocks are suitable for investors with higher risk appetite and have a longer time horizon for their investments.

As against this, the value investing style is like picking out the hidden gems from among the stones. The stocks of these companies are typically undervalued by the market as the market price does not reflect the intrinsic worth of the stock as it has not caught the attention of the market players. In other words, these stocks trade at a discount to what is considered as their fundamental worth. Picking out such hidden gems can be truly rewarding as the stock can turn out to be a multi-bagger once the market takes notice of the stock.