Value stocks vs growth stocks, that is the question. Everyone seems to be debating which one works best. And some people aren’t even sure what the difference is.
Well before we talk about them lets figure out what they both mean.
Growth Stocks
Growth stocks are stocks that, go up fast. The stock may be over priced, but the company keeps growing and growing.
Investors may not care if they are paying too much for a stock because they assume that the stock will keep up its fast growth rate.
Value Investing
Value investing is the reverse. This strategy attempts to buy strong stocks that have hit a low. For example if coca-cola (KO) took a large dive, chances are that the stock is not going to go bankrupt. Instead it would look like a great bargain, a “stock on sale”.
The strategy simply tries to find a stocks true value and buy low sell high. And it has shown proof of being viable. Between 1927 and 2006 value stocks did outperform growth stocks 11.6% a year to 9.4%.
Which One is Better?
Well everyone has their own bias, and here is mine. It depends on your time frame. Value stocks have been proven to work great over a long term time frame. That is because it concentrates on buying strong companies that will probably be around for a long time.
Growth stocks on the other hand are more likely to be the stocks experiencing their 5 minutes of fame. These stocks may go up 90% a year in a bulls market, but they also go down hard in a bears market. That is why they are much better for shorter term, momentum investing.
I would be afraid to touch a fast growing stock, unless I had an exit plan that would cut my losses short if I needed to. So while growth stocks can be good for the short term, they have too much risk in the long term at least for me.
