"You take the blue pill, the story ends. You wake up in your bed and believe whatever you want to believe. You take the red pill, you stay in Wonderland, and I show you how deep the rabbit hole goes. Remember: all I'm offering is the truth. Nothing more."
Do you recall that scene in the movie, Matrix?
The main character, Neo heard rumors of the Matrix and someone named Morpheus. So, he spent his nights at his home computer, researching everything about Matrix. Eventually, another hacker, Trinity introduced him to Morpheus.
Morpheus explained to Neo that the Matrix was an distorted reality programmed to prevent humans from discovering that they were slaves. Holding out a capsule on each palm, Morpheus described the decision that Neo must make.
You see, the blue pill will allow Neo to remain in the Matrix. Meanwhile, the red capsule acted as a "GPS" to locate his body in the real world and to prepare him to be "unplugged" from the Matrix. Once he chose the red or blue pill, the choice was irreversible.
BACK TO REALITY
Okay. But how is this relevant to today’s post?
When you begin your investment journey, you need to decide the type of investor you aspire to be.
At one corner, you have the value investor and the other end the growth investor.
Stop right there, son!
Let me show you one step at a time. Hold my hand now and follow me.
Discovered by Columbia University professors, value investing is a strategy to buy stocks at a discounted price when compared to its intrinsic value. An example would be a stock that is trading at $90, but whose intrinsic value is $100. Let me explain further.
Basically, you need to identify and purchase companies that the markets have undervalued. You’ll earn profit when the markets reevaluated and raised the actual prices of those companies.
However, keep in mind that cheap prices don’t necessarily mean good value.
You see. Value investing isn’t about purchasing stock that’s priced low. Cheap prices can be due to reasons such as company’s poor quarterly earnings report or unexpected external events like the tragic 911 incident. Prices may remain low if solutions aren’t put in place.
You must search for ones with strong fundamentals that the market hasn’t reflect in the price. Fundamentals include cash flow, earnings, book value, and business model.
Majority invests in such value stocks, as they’re perceived them to be safer. Also, these investors focus on mature companies that use their earnings to pay dividends to them.
As the name implies, growth investing is a method where the investors focus on companies with thriving sales revenue and earnings. The profits earned are rolled back for business expansion or company acquisition. It won’t be used to pay dividends to the shareholders.
There are risks to growth investing too.
Look, growth stocks have the potential to give higher returns when there is a bull market run. But they also can face rapid price drops due to poor company growth or market downturn. Therefore, you’ll require a higher risk appetite to own several of these stocks.
SCRATCHING THE SURFACE
Okay, you’ve just scratched the surface on the difference between value and growth investment.
In the table below, I’ve elaborated on the strengths and weaknesses of the respective investing strategy.
Now that you finished reading the comparison, it is time to figure out what type of investor are you meant to be one.
By identifying the trading style that fits your personality, you are able to execute your investments with more confidence.
Complete the short questionnaire below to discover your true identity as an investor.
You have an hour to relax after completing your daily chores. How would you spend your free time in investing stock investments?
How long will you own the stocks that you bought recently?
What type of stocks will you own if you have one million dollars?
You found that the price of the super stock that you owned has just dropped more than 10%. What would you do next?
What do you aim to achieve when you buy stocks?
If your answers to most of the questions is (1), you’re most likely suitable for value investing. And, if your answer favor heavily on (2) then you’re a growth investor.
Congratulations on completing the short quiz to identify your trading style!
Before ending this post, I’d like to add that investors can choose to select mixed strategy too, ones that employ both growth and value techniques. Warren Buffet, the living trading legend is considered to be a proponent of both styles of investing. He claimed, “Growth and value investing are joined at the hip.” The best situation is to find a middle ground; company with a growth philosophy that happens to be undervalued.
If you have any questions about growth investing or value investing, you can leave your comment in the section below.
ONE MORE THING
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