Growth Investing v/s Value Investing - Which is Better? | ETMONEY

[Music] there are many face-offs in investing active versus passive debt versus equities mutual fund versus stocks regular plans direct plants bulls beers and of course there is growth investing and value investing growth and value represent the two dominant styles of investing and every investor often has a preference or liens on one of these styles to put it broadly growth investing is the fast and furious approach it is built on identifying companies that have the potential to outgrow its competition in terms of revenue and profits which then translates to a jump in the stock prices when we look at value investing we are looking at a much slower but steadier approach which seeks to buy companies that are trading at a price that is lower than what they are actually worth the premise here is that those companies are undervalued and eventually the stock price will correct itself paving the way for handsome returns in this video we shall go deeper into these two styles as we understand the differences from the perspective of their objectives valuation metrics and performance where possible we'll elaborate with some specific examples and if you learn something new today then do tap onto that like button and share your observations in the comments box below let's begin [Music] growth investing's assertion is rather simple if the sales or ebitda or earnings per share of a company is growing at an above average rate then the stock price is likely to follow that same trajectory sooner rather than later these companies may be young in an emerging field and probably have the potential to dominate their field a bit like finding the next google facebook or amazon and while there are visible upsides investing in growth companies also come with some additional risk which makes these stocks pretty volatile but risk is not really what the growth investor looks for and more often than not stocks in these companies are invested into without any history to support the prevailing growth premise take somato for instance and let's ask ourselves some questions is romato's business growing yes it is is it presently profitable absolutely not does zomato pay a dividend to its shareholders no it does not is zomato likely to get bigger stronger and more profitable well we really don't know the answer to that but this is exactly what the growth investor is counting on now growth can be a function of many factors and as an investor one needs to pay a lot of attention to that for instance is this growth due to an improvement in product or strategy or is it on account of an acquisition that the company has recently made or is it merely the good fortune that the company or the sector has recently had for example in 2017 and 2018 the price of graphite electrodes had risen sharply by eight to nine times now these were favorable tailwinds for the graphite electrode industry which saw one of its leading companies heg limited putting up an impressive showing in terms of revenue and profits but then the growth was short-lived once the price of those electrodes went back to its long-term mean the point is that investors have to carefully factor things like cyclicity or inorganic growth when identifying growth companies for suitable investments now when it comes to the value investing approach the attention pans almost entirely to the opposite direction for one a value investor is not really looking for those flashy companies that are breaking records or are promising to change the world in other words no facebook no netflix no zomato instead these investors are more keen to put their money behind the more boring but established predictable companies in more mature industries to put it differently the value investor is a bargain hunter and loves preying on stocks that are priced at a 30 40 or 50 discount to their true worth or intrinsic value and to identify such companies the value investor employs a number of techniques which even includes putting money into companies that are declining or even bankrupt companies if they believe that the liquidation process will get them more money than what they had originally invested so in effect value investing is based on what's presently available while growth investing a lot like what we saw with zomato is looking more into what a business might be in the future and speaking of zomato and its growing food delivery business another growing superstar that has been delivering delicious videos every week is the eti money youtube channel so if you haven't subscribed to our channel or invited your friends to join our growing community then kindly do so as we continue to grow our repository of videos on investing and personal finance [Music] a value investors interest in determining the right price to pay for a stock should come as no surprise they are bargain hunters and are keen to try different approaches to understand the true worth or the intrinsic value of a stock now one of the most basic valuation techniques used by value investors and even by everyday investors is to look at the price earning ratio or the pe multiple of the stock a price earning ratio is nothing but the number we get when we divide the price of a stock with its earnings per share to put it differently the p e ratio gives us the price we need to pay for one rupee of profit now since a large meteor part of the earnings is to come in the future growth stocks generally have a high p ratio while value stocks tend to have a low p ratio in fact if you'd like more information on how the p ratio works and how an investor can take the maximum advantage i truly recommend a video on the p e ratio whose link has been attached in the description of this video in addition to the p e ratio there are many other metrics that show contrasting characteristics for instance growth stocks command a higher price when compared to their earnings their book value or their operational cash flows and likewise companies of value-oriented stocks offer a higher dividend payout and a higher dividend yield as compared to growth companies so here's what it comes down to growth stocks are more expensive they have high sometimes very high p ratio pb ratio which is all driven by the future potential that these stocks carry these are the apple of the stock market's eye in fact let's look at apple the company in december of 2007 the apple stock was at an all-time high p e of almost 40 as against the then long-term p ratio of about 18. this might seem expensive but then apple had the newly introduced iphone and there were many investors who believed in the company's growth prospects and since then the company has done extremely well on most counts and that investor who picked up that apple share for six dollars in 2007 would have made an annualized return of 25 over these last 14 years and that's how growth investing works the stock that seemed very expensive at that time is now looking much like a bargain for the growth investor [Music] comparing the performance of growth and value stocks is a favorite topic of discussion in business channels and podcasts and in the last few years there have been a lot of chatter on the possible demise of value investing but the truth of the matter is that both the growth cycle and the value cycle takes turns in outperforming and underperforming the market to substantiate this we looked at two very popular indices pertaining to the u. s stock market the russell 1000 growth index and the russell 1000 value index these indices were tracked since 1979 onwards so a good four decades of data was taken and what came out is that both these indices have given almost identical returns over the last 41 years with growth giving 12.

1 returns and the value index delivering 12. 0 percent but while the numbers are similar the path to reach these returns for these two indices has been completely different the growth index had its best years between 1989 and 1999 and then again between 2009 and 2020 when it clocked over 20 percent of annual returns likewise value stocks fed a lot better than growth stocks between 1979 and 1988 and again between the years 2000 and 2008 so there is some pattern that's emerging here which seems to show that growth and value preferences change every 10 years or so even when we see the data in shorter cycles say using a three year rolling return we kind of see how growth and value stocks go through a meandering journey of relative over performance and under performance to each other as we see here the gap in returns is pretty wide between the two investing strategies and what's interesting to observe are the precise moments when the growth story turns to value and the value story goes back to growth notice here that when the stock markets find themselves in a major and turbulent time there is a tendency for the market participants to switch from one strategy to the other we see this in 1987 when the u. s stock markets fell by over 20 on a single day then in 1992 with the bursting of a super inflated japanese property market then the dot-com bubble in the early 2000s and the global financial crisis in 2008.

having said this it'll be interesting to see in which directions the wind are moving now on account of the 2020 covet pandemic now the analysis we have done here is on the u.