Let Me Clarify

The goal of investing, in statement at least, is simple: Choosing a place to put your money and hoping it grows over time. For an investment professional, this must be a process that is repeatable, regardless of current market conditions. While there are several approaches utilized by investment professionals to identify appropriate investments that work toward this goal, two of the more commonly used are value investing and growth investing.

Value Investing

Value investing is a strategy that is designed around the idea that in the market, some stocks are undervalued relative to others. Proponents of this approach, such as Warren Buffett, believe that markets occasionally misprice securities, and the goal of someone seeking to identify an investment opportunity would identify this value.

Value investors might scrutinize financial statements, earnings reports, and other data to evaluate a company's intrinsic worth. They seek out companies whose stocks are trading at a discount to their intrinsic value, often indicated by low price-to-earnings (P/E) ratios or other valuation metrics. Once the company’s stock value grows enough to exceeds its intrinsic value, true value investors sell the stock, as it’s no longer consider a value. This leads to the perception that value investors often are buying what everyone else is selling, and selling what everyone else is buying. While not exclusive to this approach, the term “bottom-up investing” often is associated with value investors. You are beginning your search for a suitable investment by examining an individual company, and deciding whether that company makes sense as an investment when compared to the larger market.

Growth Investing

To contrast, growth investing might be considered “top-down”. Growth investors, such as Cathie Wood, will likely focus more on industries that they feel are going to expand or disrupt in the future, and begin considering individual companies with strong growth potential within those industries for investment.

Growth investors believe that these companies will continue to experience above-average growth rates and, consequently, generate higher stock prices in the future. Instead of weighting current profitability and current financials (like a value investor might), growth investors might put more emphasis on things such as revenue growth, market share, and disruptive innovation.

Both value investing and growth investing are approaches that are commonly used in the industry, and personally, I think most investment firms that choose individual investments use somewhat of a mixture of these approaches, as each comes with its own set of advantages and considerations. As always, there might be specific things in your situation that could make one approach more valuable than the other, so be sure to discuss this with your financial professional before adopting either of these approaches exclusively.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.