Recently, Granite Investment Advisors welcomed a long-term friend (and previous employee) home to the firm. In welcoming Bill Hutchens back to the fold, we further strengthen our bench of growth-based investment advisors.
Given this, we thought we’d take the opportunity to quickly look at the differences—and similarities—of growth- and value-based investing.
Some Quick Background
When considering your investment strategy options, it’s important to understand there are two main philosophies and approaches to investing. The two main investment strategy categories are a value-based investment strategy and a growth-based investment strategy.
Knowing and understanding their differences and, even some similarities, can help you determine which strategy will best help you to meet your financial goals.
Value-Based Investment Strategy
A key element that drives a value-based investment strategy is that it seeks out those stocks that are traded for less than their intrinsic value. Contrary to the way many investors tend to pick and choose stocks, those using a value-based strategy realize that a company’s stock price isn’t always a reflection of its worth.
Whether you understand it or not, most investors find themselves overtaken by their emotions when it comes to the stocks they buy and sell. In many investors’ minds, a company that is doing well and whose stocks are rising becomes one that is a ‘must-have’. Not surprisingly, if that same company faces a crisis that causes its stock to plummet, even just one day later, its investors start selling off their shares, as quickly as possible. While this strategy makes sense on an emotional level, a value-based strategy seeks to think beyond the current happenings with any stock, company, or event.
Of course, there are some details that need to be addressed but the primary and driving force behind a value-based strategy is the belief that the company’s value is underrated. While the reasons could vary, this is most typically the result of the irrational behavior of investors. Stocks with price-to-earnings (P/E) ratios and price-to-book (P/B) ratios that are lower than average are attractive to investors who follow this investment strategy. A company with higher dividend yields is also often sought out, as long as the investor believes the company’s intrinsic value is high enough to make it a good investment.
Growth-Based Investment Strategy
As its name indicates, a growth-based strategy focuses primarily on the overall growth of the company—specifically companies that are growing sales. This is typically accomplished through the careful investment in companies and stocks that show signs of growth that is expected to outstrip the average within the industry and/or the market.
In terms of choosing which stocks and companies to invest in, when you focus on a growth-based strategy, you follow a different methodology than those who want to invest solely on the merits of intrinsic value.
For example, for a growth-based strategy, you want to look for companies that are performing better than average, have great business models, and have protections in place (sometimes referred to as moats) to protect this growth.
Some other considerations might include investing in companies that have products or services that are disruptive in nature. For example, how Amazon is changing the retail landscape. Other examples are leading edge technology companies such as Alphabet, formerly Google, or Apple which are changing the way we work and communicate.
Another element that a growth-based investor uses to evaluate a company for its suitability as an addition to their portfolio is its financial performance across its entire history, as well as its position when compared to its performance within the industry. Other factors include the company’s management and their plan to add shareholder value through capital spending, acquisitions, buybacks, and/or dividends. This type of investor investigates the company to determine if it has strong earnings growth on a historical level and in the future.
While the two investment strategies are often considered the opposite of one another, there is a similarity between a value-based and growth-based strategy. It’s that there is no magic or single formula that is scripted to ensure your success. Instead, when you are an investor that relies on a growth-based strategy, attempt to project the growth of a particular company, market, or stock and make a purchase before it becomes a household name or increases in popularity.
Can Both Investment Strategies Work Together?
It might seem like you can’t combine value-based and growth-based strategies. After all, a value-based approach seeks to project the continuing value of a company and its stock. And, a growth-based strategy focuses on a company’s growth. However, every investor needs to remember that there are few companies or stocks out there that fit neatly into one category or the other.
Instead, you can use both strategies to accomplish your long-term goal – to develop, grow, and or protect your wealth, by buying low and selling high. The reality is, maintaining a flexible approach to your investing can allow you to take advantage of stocks as the market shifts through its various cycles. Being open to both value-based and growth-based opportunities, allows you to enjoy a diverse investment strategy, versus sticking with one method or another.
Of course, the exact ratio that you choose to invest in growth stocks and value stocks is something that is best determined with the guidance of a professional investment advisor. Granite Investment Advisors has the insights and resources you need to reach your financial goals.
When you’re ready to have a conversation that has the potential to completely change the performance of your portfolio, give us a call 603-226-6600 or schedule an appointment.
Past performance is no guarantee of future results. Returns are presented net of management fees. There can be no assurance that any of the securities referred to herein were produced for or remain in portfolios managed by Granite Investment Advisors. A complete list of all Granite Investment Advisors’ recommendations within the preceding year is available upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities described herein.