Sunday, April 30, 2006

Value investing Vs. Growth investing

This article is an attempt to demarcate the line
between two widely used investment philosophies namely
value investing and growth investing. Both these styles
emphasize on getting maximum returns at manageable risk. The
difference ,however is in different perceptions about risk
involved with an investment. Value investing is buying assets at a cost less than their intrinsic worth. The intrinsic worth is measured as the current
market value of all tangible assets of the company. A more
conservative approach would recommend buying at a cost less
than the net current assets of the company (to get
fixed assets for free..).In reality this also means
that a stock qualifying for value investment will most
certainly be an unpopular stock which has lost its value
due to bleak short term prospects, lack of interest
or general apathy towards company. The value investor
is by definition a contrarian. He buys when everybody
sells. Growth investing means , putting your money in
the industries with best prospects. Though it sounds
very logical ,it may not be so. When everybody is so
sure about the bright prospects of the future of the
company the demand will push the price to such a high
level that its quite possible that the future growth is
already accounted for in the prices. The growth investor
relies on his timing skills to enter at a price where
there is some scope for profits. This is not so simple
as all are trying to beat each other by buying at
just right moment. The growth investor's domain is high
growth(..thus popular and high priced) stocks. Apart form the obvious differences there are some subtle
differences in these styles. Whereas the value approach
recommends to minimize risk by buying assets worth the
amount you pay for , the growth investor seeks safety in
the better prospects. The value investor relies in his
valuation skills whereas the growth investor relies on his
timing skills. The growth investor wants to get results
quickly but loses the certainty of profits as a
bargain. The value investor sacrifices the urge to get
quick results for certainty of the results. What does all this mean to a small investors. Though there
may be differences in opinion, value investing makes
an strong case for small investor. Predicting future
accurately is not everybody's ball game. Even an error of 20%
can make the difference between a profit and
crippling losses. The value investor does not need such an
skill. In Ben Graham's words he just need to be familiar
with high school mathematics. He does not need to take
quick decisions. He does not need to stay in touch with
market movements regularly as long as he has bought
scrips below there value. However, he needs a strict
discipline to avoid pitfalls of human emotions of getting
excessively euphoric of excessively depressed. He needs
patience and will power to go against the general trend.
Simple all these may sound but these qualities need to
be cultivated. Its not hard to understand why value
investing is not a popular style despite its superior
results . Investors are however free to choose their pick
as either of these is better than a haphazard way of
investing(which is the popular approach of most of the investors

Posted: Nov 27, 2000

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