Choosing shares to invest in can be difficult. So how can you make good investment decisions?
In the Money Magic Facebook group, we spend our Fridays discussing investment strategies and look at how various investors build investment portfolios.
A few weeks ago we look at value investing.
1. The difference between Value Investing and Growth Investing?
Value investors invest in under-priced companies - companies with high profits but low share prices. Value investors (Warren Buffet) like companies with solid profits and great financial statements.
Growth investors are more concerned with share prices; they prefer companies with high share prices and low profits because they have a belief that share prices are connected to profits.
Growth investors are the type of investors that invested in Facebook before Facebook even had a viable revenue stream.
As you can imagine, value investors don't think along these lines - they need to see proof of profitability before deciding to invest.
2. Growth investors work on the premise that share price is driven by profitability
Growth investors invest in potential and work on the premise that profits are driven by share price.
Their focus is on what could potentially happen in the future instead of what's happening in the present which makes growth investment strategies high risk.
And of course, high risk also has the potential to yield high returns.
For example, most growth investors invested in Twitter because it has a large audience but right now Twitter is struggling to grow its audience and also struggling to find a viable revenue strategy.
That's risky because we don't know how long it will take the company to get a viable revenue stream.
If you decide to employ a growth investing strategy your best bet is to find an industry that’s growing and invest in companies in that industry because chances are some of those companies will also grow quickly.
Value investing is less risky because you're investing in a company that's already established.
3. So what investing strategy works best?
Value investors have done better in history or over time compared to growth investors
Interestingly though, growth investors have done better in the last 2 or 3 years.
The beauty of growth investors is that they can make lots of money because they're willing to invest in new industries.
They can make high returns and great fortunes when they invest in the right companies because they get first mover advantage which gives them high returns in the short term.
4. Similarities between growth and value investors
Both investors do research on the historical share price.
Whatever strategy you work with, you'll have to study the company’s financial statements and look at how the company is doing.
The difference is that value investors put more store in what you’ve done and are doing, whereas growth investors also put store in what you'll do,
At the end of the day, all investors want to know that revenues are not being wasted. Even growth investors want to see this because the companies that stand the test of time in new industries are the companies that know how to use money wisely.
Personally I like growth investing as well as value investing and I think you can merge the two.
Let me know your thoughts in the comments section below!