Once again, the differences reflect risk taking or risk aversion while building an investment portfolio.
Value investing is a strategy whereby investors will look at a company’s intrinsic value and seek out stocks of companies that they believe are undervalued, where their stock prices don’t necessarily reflect their fundamental worth, due to either the company or the industry having fallen on hard times, or due to a poor quarterly report affecting the company’s stock price; basically, they’re looking for diamonds in the rough. Experts look for what they refer to as a “margin of safety” whereby the price a company is trading at is less than its intrinsic value, or the value of future cash flows. Value investing focuses more on safety rather than growth, with companies using their earnings in order to pay out high dividends thus producing more current income than growth, while also offering the potential for long-term growth. This is a less risky investment strategy than growth investment.
Growth investment is when investors focus on companies which they believe will experience a higher-than-average growth in terms of revenues, earnings or cash flows, and which companies often use their profits to re-invest in more acquisitions rather than paying out high dividends. Investors will look for companies whose stocks tend to have above market price-to-earnings and price-to-sale ratios. They represent the potential for higher returns in the long run and tend to do better than the market when stock prices in general are rising, but they also represent a greater risk to investors than Value Investing.