Long-term investors are often divided into two categories: value investors and growth investors. Value investors and growth investors focus on companies with different fundamental attributes. With the right strategy, both investing approaches can yield excellent long-term returns.
In this guide, we’ll explain the difference between value investing vs. growth investing and help you decide which investing style is right for you.
What is Value Investing?
Value investing is a style of investing that involves finding stocks that are priced below what they’re “worth.” The idea is that the market often overreacts to bad news or underestimates a company. Eventually, an undervalued stock’s price should rise to match its fair value.
Figuring out what a stock should be priced at is a big part of value investing. There are many different approaches, and smart investors can come up with very different fair value estimates for a single stock.
In addition, just because a stock is undervalued does not mean it will rise in price quickly. Stocks can remain undervalued for many years. So, while the concept of value investing may seem simple at first, it can be quite challenging in practice to identify the best value stocks to invest in.
What is Growth Investing?
Growth investing involves investing in fast-growing companies that investors believe will generate significantly higher earnings in the future. As a company’s earnings increase over time, its stock price should go up, too.
Growth stocks are often “expensive” based on traditional valuation metrics like price-to-earnings (P/E). However, that may be justified if an investor believes that the company’s future earnings will be much higher.
Growth investing involves finding companies that are poised for growth, evaluating their growth potential, and determining what that equates to in terms of future stock price. There are many unknowns in predicting a company’s future, which is part of the challenge of growth investing.
Value Investing vs. Growth Investing: Similarities
While value investing and growth investing are distinct styles of investing, they do have some important similarities.
First, both strategies aim to achieve strong, market-beating returns. These strategies revolve around picking individual stocks rather than investing in market-tracking indices.
Second, both value and growth investing require a lot of research. Investors need to put in effort to find undervalued companies or companies that have strong growth potential. They also need to have a deep understanding of the companies they’re investing in and a clear investment thesis.
Finally, both value and growth investing are long-term investment strategies. Investors are typically planning to hold investments for at least several years and sometimes as long as decades.
Value Investing vs. Growth Investing: Differences
There are a number of differences in the types of companies that value and growth investors invest in and the way they approach investing.
In general, growth stocks tend to be more volatile than value stocks. This is in part because growth stocks are often found in fast-moving and cyclical industries like tech. It’s also because growth stocks change more rapidly than value stocks. They may be acquiring new customers and growing revenue at a fast pace, and that can lead to big price swings when earnings are announced.
Value investors typically focus on more mature companies that have proven their business models and have wide moats protecting their business from competition.
Growth investors, on the other hand, focus on younger companies that are still growing. Many growth companies are closer in time to their startup days and retain a mentality of acquiring customers as quickly as possible.
Of course, age alone doesn’t determine whether a company is a value or growth stock. There are many mature companies, particularly in the tech sector, that are growing by introducing new business lines or entering new markets.
Value and growth investors both rely on fundamental analysis to judge stocks. However, they are often looking for different things in their analyses.
Value investors look for companies that are generating consistent profits and have excellent financial health. They may also pay close attention to dividends, both as a source of cash flow and as a sign that a business is doing well and intends to reward shareholders.
Growth investors are often less concerned with short-term profitability. Companies may need to take quarterly losses in the near-term in order to drive expansion that will lead to profits down the line. Many growth companies have very high P/E ratios and don’t pay dividends, choosing instead to re-invest cash in the business to fuel growth.
Growth investors usually focus on revenue growth along with metrics such as customer acquisition and retention.
Another difference between value and growth investors lies in how they think about a company’s value. Value investors focus on a company’s value right now compared to what they believe the company’s fair value is at present. Typically, value investors re-assess their fair value estimates with each earnings report in response to new financial data.
Growth investors think about what a company will be worth in the future. Instead of focusing on a company’s current value, they look at the potential addressable market for a company and its likely share of that market. Growth investors primarily change their projections for a stock in response to perceived changes in the company’s future market.
In theory, a strong growth stock could generate greater returns than a good value stock. The reason is that successful growth stocks have a huge amount to gain, whereas value stocks are inherently defined by having a limited amount to gain.
Of course, a lot depends on the individual stock picks. A highly skilled value investor can easily outperform a growth investor who doesn’t spend enough time researching companies.
Value and growth investing are both long-term strategies, but they can have slightly different time horizons.
Value investments typically only take a few months to a few years to come to fruition. That’s generally the amount of time it takes for a market to self-correct for a company that has been undervalued.
Growth investments can take many years to reach their full potential. The tech industry of the last decade has shown that many companies that investors thought were done growing had a lot of price appreciation left in them. Investors may plan to hold growth stocks for at least five years.
Resources for Growth Investors
There are many excellent resources for growth investors. We’ll briefly highlight a few of our favorites.
Seeking Alpha is a powerful fundamental stock research platform that offers in-depth financial data, a stock screener, stock picks, and more. What’s great about this platform is that it includes A-F ratings for each stock’s growth potential and momentum. Growth investors can use the built-in stock screener to quickly find good growth stock candidates and then use Seeking Alpha’s research tools to dig into them.
Seeking Alpha offers many stock research tools for free. You’ll need a Premium subscription to unlock the screener. It costs $49 for the first year, then $239 per year.
Motley Fool Stock Advisor
The Motley Fool Stock Advisor is a stock-picking newsletter that has outperformed the S&P 500 by more than three-fold since it launched in 2002 (as of December 2022). It focuses on explosive growth stocks and recommends an investment horizon of at least three years.
The newsletter offers two new ready-to-buy stock picks each month, enabling investors to add growth stocks to their portfolios with very little research effort. Stock Advisor also offers lists of starter stocks and timely growth stocks to re-invest in.
Stock Advisor costs $199 per year, however you can use this link to access the latest discount.
How to Make Money in Stocks
How to Make Money in Stocks is a book by William O’Neil that presents a clear-cut strategy for investing in growth stocks. O’Neil lays out seven criteria that growth investors should consider when researching stocks, making it easy to determine which stocks to add to your portfolio. This is a must-read book for every growth investor.
Resources for Value Investors
We also have a few favorite resources for value investors.
Seeking Alpha isn’t just for growth investors. The platform offers A-F ratings for stocks’ value and profitability in the same way it rates growth and momentum. Investors can similarly put Seeking Alpha’s screener to work to find top-rated value stocks.
In addition, Seeking Alpha offers opinion articles written by financial analysts about individual stocks. Many of these articles dive deep into valuation analysis to figure out a company’s fair value. Value investors can incorporate these estimates into their research when deciding what stocks to buy.
GuruFocus shows investors the portfolios of well-known value investors like Warren Buffett, Charlie Munger, Bill Ackman, and others. You can be alerted when these gurus add or remove stocks from their portfolio and see what stocks multiple gurus are buying.
GuruFocus also offers a wealth of valuation data, model portfolios, and value-focused stock screeners. The amount of data can be a little overwhelming, but it’s incredibly useful for value investors who want to build their own financial models.
GuruFocus starts at $499 per year.
The Intelligent Investor
The Intelligent Investor by Benjamin Graham is widely considered the bible for value investing. Graham explains the benefits of value investing, how to evaluate the fair value of a company, and how to choose the strongest value stocks. Graham was Warren Buffett’s mentor and every value investor can benefit from reading his words.
Which Investing Style is Right for You?
Choosing between value and growth investing comes down to a few different factors.
First, consider your tolerance for risk. Growth stocks tend to be more volatile and can lose value rapidly in a market downturn. Risk-averse investors may find that value investing suits them better.
Next, think about how you approach stock research and analysis. If you have a nose for finding disruptive companies that could be the next Amazon or Netflix, you might be very successful as a growth investor. On the other hand, if you’re better at spotting companies you think the market has overlooked, you might find more success as a value investor.
Third, consider your time horizon for investing. If you’re close to retirement, the reduced volatility of value stocks can be very important. If you plan to hold your investments for many years, then you may be more willing to weather volatility in growth stocks.
Finally, think about what you hope to get out of investing. Growth investing may generate higher returns than value investing, but those returns may also be distributed less evenly over time. If dividends are important to you, value investing may be the better option.
Conclusion: Value Investing vs. Growth Investing
Value and growth investing represent two different approaches to long-term investing. Value investing focuses on stocks that are undervalued relative to their “true” worth, while growth investing focuses on fast-growing companies that could generate much higher earnings in the future. When choosing which investing style is right for you, be sure to consider your tolerance for risk, your approach to stock research, and your investment goals.