Growth and Value: What’s the Difference?

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While the majority of American investors understand the importance of diversifying across growth and value investments, few are able to achieve a passing grade on a test of their knowledge of the differences between the two, according to a new American Century Investments survey.
Growth and Value: What’s the Difference?
While the majority of American investors understand the importance of diversifying across growth and value investments, few are able to achieve a passing grade on a test of their knowledge of the differences between the two, according to a new American Century Investments survey.

Test your knowledge with the Growth & Value IQ quiz below:

1. Which best describes a growth stock?

a) Stock that offers guaranteed rate of growth tied to consumer price index.

b) Stock in a company specializing in agriculture, lumber, landscaping, and other organic products.

c) A stock in a company demonstrating better than average profit and earnings gains.

d) All of the above.

2. Which best describes a value stock?

a) Stock in fast-growing company specializing in high-value, low-cost products, like a discount retailer.

b) Stock in a company specializing in valuable goods, like precious metals and jewelry.

c) Stock that has a low price-to-book ratio.

d) All of the above.

3. Which statement is true?

a) Value stocks outperformed growth stocks between 1927 and 2001.

b) Smaller company value stocks outperformed larger company value stocks between 1927 and 2001.

c) Maintaining a portfolio with a combination of growth and value stocks generally is considered a prudent investment approach.

d) All of the above.

4. During periods of strong economic expansion, which fund generally performs better?

a) Growth.

b) Value.

c) Neither.

d) Both.

5. Generally speaking, value funds outpaced growth funds in 2000 and 2001.

a) True.

b) False.

6. Generally speaking, growth funds outpaced value funds during the 1990s.

a) True.

b) False.

7. Which type of fund is more likely to invest in stocks paying a significant dividend?

a) Growth.

b) Value.

c) Neither.

d) Both.

8. Higher price-to-earnings ratios normally would be associated with stocks in which type of mutual fund?

a) Growth.

b) Value.

c) Neither.

d) Both.

9. What kind of stock is described in this example: “Established baked-goods company with strong balance sheet and good cash flow experiencing temporary drop in reaction to changes in senior management.”

a) Growth.

b) Value.

c) Neither.

10. What kind of stock is described in this example: “Software company, enjoying steady sales increases, is in the process of rolling out an eagerly anticipated update to a popular software application.”

a) Growth.

b) Value.

c) Neither.

Key: 1(c); 2(c); 3(d); 4(a); 5(a); 6(a); 7(b); 8(a); 9(b); 10(a). – NU

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Chasing Value Versus Growth

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A lot of opinions had been thrown regarding the benefit of value investing versus growth investing. The proponents of each styles of investing insists that their method is superior over the other.
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A lot of opinions had been thrown regarding the benefit of value investing versus growth investing. The proponents of each styles of investing insists that their method is superior over the other.

I believe that each has its own merit. Being a proponent of value investing, let me state the case for value investing. First, value investors buy companies in a mature industry. That said, it is easier to predict earning of such company. This is why I lean towards value investing. I am in favor of reducing risk instead of chasing return. Anybody can make an estimate that a small biotech company A will rake in X amount of profit after several years. But, if your prediction is not accurate, then how do you determine the fair value of the common stock? Your valuation will be out of whack. Disease comes and go. Technology fames and fades. It might defy common sense to some but I prefer a low or no growth industry.

Another benefit of investing in value stocks is that you might get decent dividend yield from the companies. They are growing less and management feel that they do not need all that profits to fund expansion. As a result, they propose dividend payments to shareholders. This helps reduce risk.

Having said that, I believe that the return of growth stocks will be higher than value stocks. No, I don’t mean you can profit handsomely buying overpriced stock. You should of course buy it at a reasonable price. You should not overpay for any stocks, including growth stocks. Growth stock is companies that are growing or expected to grow rapidly in future. Is advertising a growing industry? Yes, but it is not growing big. How about pay per search or pay per call advertising? Oh, yes. If you invest in these types of companies, you are investing in growth stocks. These new forms of advertising is less than 5 % share of total advertising budget. Can their share grow? You bet. Just like television gets some share of advertising pie, pay per click advertising will get more of its share if it is cost effective for advertisers to do so.

We can say that value investing takes less return for engaging in little risk. Growth stock, on the other hand, takes in more risk in order to garner greater return. That is fine. There are, however, other kind of investing that will burn your pocket. A lot of investors engage in an investing style that get little reward while taking a big risk! Buying a stock at any price is one example. Do not misunderstand growth stocks with buying at any price. It is just plain silly. There are calculations and predictions involved in buying a common stock. Determine its fair value and decide whether you want to invest on a stock based on the risk/reward that it offers.

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