A lot of opinions had been thrown regarding the benefit of value
investing versus growth investing. The proponents of each styles of
investing insists that their method is superior over the other.
I believe that each has its own merit. Being a proponent of value
investing, let me state the case for value investing. First, value
investors buy companies in a mature industry. That said, it is easier
to predict earning of such company. This is why I lean towards value
investing. I am in favor of reducing risk instead of chasing return.
Anybody can make an estimate that a small biotech company A will rake
in X amount of profit after several years. But, if your prediction is
not accurate, then how do you determine the fair value of the common
stock? Your valuation will be out of whack. Disease comes and go.
Technology fames and fades. It might defy common sense to some but I
prefer a low or no growth industry.
Another benefit of investing in value stocks is that you might get
decent dividend yield from the companies. They are growing less and
management feel that they do not need all that profits to fund
expansion. As a result, they propose dividend payments to shareholders.
This helps reduce risk.
Having said that, I believe that the return of growth stocks will be
higher than value stocks. No, I don't mean you can profit handsomely
buying overpriced stock. You should of course buy it at a reasonable
price. You should not overpay for any stocks, including growth stocks.
Growth stock is companies that are growing or expected to grow rapidly
in future. Is advertising a growing industry? Yes, but it is not
growing big. How about pay per search or pay per call advertising? Oh,
yes. If you invest in these types of companies, you are investing in
growth stocks. These new forms of advertising is less than 5 % share of
total advertising budget. Can their share grow? You bet. Just like
television gets some share of advertising pie, pay per click
advertising will get more of its share if it is cost effective for
advertisers to do so.
We can say that value investing takes less return for engaging in
little risk. Growth stock, on the other hand, takes in more risk in
order to garner greater return. That is fine. There are, however, other
kind of investing that will burn your pocket. A lot of investors engage
in an investing style that get little reward while taking a big risk!
Buying a stock at any price is one example. Do not misunderstand growth
stocks with buying at any price. It is just plain silly. There are
calculations and predictions involved in buying a common stock.
Determine its fair value and decide whether you want to invest on a
stock based on the risk/reward that it offers.
