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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Dealing With Market Corrections: Ten Do and Don’ts

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A correction is a beautiful thing, simply the flip side of a rally, big or small. As long your cash flow continues unabated, the change in market value is merely a perceptual issue.
invest, stock market, asset allocation, value stocks, working capital
A correction is a beautiful thing, simply the flip side of a rally, big or small. Theoretically, even technically I’m told, corrections adjust equity prices to their actual value or “support levels? In reality, it much easier than that. Prices go down because of speculator reactions to expectations of news, speculator reactions to actual news, and investor profit taking. The two former “becauses” are more potent than ever before because there is more “self directed” money out there than ever before. And therein lies the core of correctional beauty! Mutual Fund unit holders rarely take profits but often take losses. Opportunities abound!

Here a list of ten things to do and/or to think about doing during corrections of any magnitude:

1. Your present Asset Allocation should have been tuned in to your goals and objectives. Resist the urge to decrease your Equity allocation because you expect a further fall in stock prices. That would be an attempt to time the market, which is (rather obviously) impossible. Proper Asset Allocation has nothing to do with market expectations.

2. Take a look at the past. There has never been a correction that has not proven to be a buying opportunity, so start collecting a diverse group of high quality, dividend paying, NYSE companies as they move lower in price. I start shopping at 20% below the 52-week high water mark, and the shelves are full.

3. Don’t hoard that “smart cash?you accumulated during the last rally, and don’t look back and get yourself agitated because you might buy some issues too soon. There are no crystal balls, and no place for hindsight in an investment strategy.

4. Take a look at the future. Nope, you can’t tell when the rally will come or how long it will last. If you are buying quality equities now (as you certainly could be) you will be able to love the rally even more than you did the last time?as you take yet another round of profits. Smiles broaden with each new realized gain, especially when most folk are still head scratchin?

5. As (or if) the correction continues, buy more slowly as opposed to more quickly, and establish new positions incompletely. Hope for a short and steep decline, but prepare for a long one. There more to Shop at The Gap than meets the eye.

6. Your understanding and use of the Smart Cash concept has proven the wisdom of The Investor Creed. You should be out of cash while the market is still correcting. [It gets less and less scary each time.] As long your cash flow continues unabated, the change in market value is merely a perceptual issue.

7. Note that your Working Capital is still growing, in spite of falling prices, and examine your holdings for opportunities to average down on cost per share or to increase yield (on fixed income securities). Examine both fundamentals and price, lean hard on your experience, and don’t force the issue.

8. Identify new buying opportunities using a consistent set of rules, rally or correction. That way you will always know which of the two you are dealing with in spite of what the Wall Street propaganda mill spits out. Focus on value stocks; it just easier, as well as being less risky, and better for your peace of mind. Just think where you would be today had you heeded this advice years ago?
9. Examine your portfolio performance: with your asset allocation and investment objectives clearly in focus; in terms of market and interest rate cycles as opposed to calendar Quarters (never do that) and Years; and only with the use of the Working Capital Model, because it allows for your personal asset allocation. Remember, there is really no single index number to use for comparison purposes with a properly designed value portfolio.

10. Finally, ask your broker/advisor why your portfolio has not yet surpassed the levels it boasted five years ago. If it has, say thank you and continue with what you’ve been doing. This one is like golf, if you claim a better score than the reality, you’ll eventually lose money.

11. One more thought to consider. So long as everything is down, there is nothing to worry about.

Corrections (of all types) will vary in depth and duration, and both characteristics are clearly visible only in institutional grade rear view mirrors. The short and deep ones are most lovable (kind of like men, I’m told); the long and slow ones are more difficult to deal with. Most corrections are “45s” (August and September, ’05), and difficult to take advantage of with Mutual Funds. But amid all of this uncertainty, there is one indisputable fact: there has never been a correction that has not succumbed to the next rally… its more popular flip side. So smile through the hum drum Everydays of the correction, you just might meet Peggy Sue tomorrow.

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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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In Value Stock Investing, Quality is Job One

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How do we create a confidence building Stock Selection Universe? Simply operating on blind faith with one of the common definitions may be too simplistic, particularly since many of the numbers originate from the subject companies.
Value,stock,investing,equity,selection,worksheet,investment,portfolio,financial,plan,NYSE,fund,manager,asset,allocation,security,investor,IPO,dividend,income
How much financial bloodshed is necessary before we realize that there is no safe and easy shortcut to investment success? When do we learn that most of our mistakes involve greed, fear, or unrealistic expectations about what we own? Eventually, successful investors begin to allocate assets in a goal directed manner by adopting a realistic Investment Strategy… an ongoing security selection and monitoring process that is guided by realistic expectations, selection rules, and management guidelines. If you are thinking of trying a strategy for a year to see if it works, you’re due for another smack up alongside the head! Viable Investment Strategies transcend cycles, not years, and viable Equity Investment Strategies consider three disciplined activities, the first of which is Selection. Most familiar strategies ignore one of the others.

How should an investor determine what stocks to buy, and when to buy them? Will Rogers summed it up: “Only buy stocks that go up. If they aren’t going to go up, don’t buy them.” Many have misread this tongue-in-cheek observation and joined the “Buy (anything) High” club. I’ve found that the “Buy Value Stocks Low (er)” approach works better. A Google search produces a variety of criteria that help to identify Value Stocks, the standards being low Price to Book Value, low P/E ratios, and other “fundamentals”. But you would be surprised how the definitions can vary, and how few include the word “Quality”. In the late 90’s, it was rumored that a well-known Value Fund Manager was asked why he wasn’t buying dot-coms, IPOs, etc. When he said that they didn’t qualify as Value Stocks, he was told to change his definition… or else.

How do we create a confidence building Stock Selection Universe? Simply operating on blind faith with one of the common definitions may be too simplistic, particularly since many of the numbers originate from the subject companies. Also, some of the figures may be difficult to obtain quickly, and it is essential not to get bogged down in endless research. Here are five filters you can use to come up with a selection universe of higher quality companies, and you can obtain all of the data inexpensively from the same source:

1. An S & P Rating of B+ or Better. Standard & Poor’s is a major financial data provider to the investment community, and its “Earnings and Dividend Rankings for Common Stocks” combine many fundamental and qualitative factors into a letter ranking that speaks only to the financial viability of the rated companies. Potential market performance (a guessing game anyway) is not a consideration. B+ and above ratings are considered Investment Grade. Anything rated lower adds an element of unnecessary speculation to your portfolio. A staff of thousands does your research for you.

2. A History of Profitability. Although it should seem obvious, buying stock in a company that has a history of profitable operations is less risky than acquiring shares in an unproven, or start-up entity. Profitable operations adapt more readily to changes in markets, economies, and business growth opportunities. They are more likely to produce profit opportunities for you quickly.

3. A History of Regular Dividend Payments. The payment of regular dividends, and periodic increases in rate paid, are sure signs of economic viability. Companies will go to great lengths, and endure great hardships, before electing either to cut or to omit a dividend. There is no need to focus on the size of the dividend itself; Equities should not be purchased as income producers. A further benefit of using dividend payment as one of your selection criteria is the clear indication of financial stress that a cut communicates.

4. A Reasonable Price Range. You will find that most Investment Grade stocks are priced above $10 per share and that only a few trade at levels above $100. If you have a seven-figure portfolio, price may not matter from a diversification standpoint, but in smaller portfolios, a round lot of a $50 stock may be too much to risk in one position. An unusually high price may be caused by an unusually high degree of sector or company specific speculation while an inordinately low price may be a good warning signal. With no real structural size limitations, I feel comfortable with a range between $10 and $90 per share… but I would avoid most issues at the higher level.

5. A NYSE Listed Security. I’m not sure that the listing requirements for the NYSE are still more restrictive than elsewhere, but it is helpful to be able to focus on just one set of statistics since most of the information you need regularly is reported by Exchange (Market Stats, Issue Breadth, and New Highs vs. New Lows).

Your Selection Universe will become the backbone of your Equity Investment Program, so there is no room for creative adjustments to the rules and guidelines you’ve established… no matter how strongly you feel about recent news or rumor. Now you can focus on operating procedures that will help you diversify properly by position size, industry, etc., and on guidelines that will help you identify which stocks should be watched closely for purchase when the price is right. Keeping in mind that you want to sell each Equity Position at a target profit ASAP, you’ll want to establish appropriate buying (and selling) rules. For example, I never consider buying a stock until it has fallen at least 20% from its highest level of the past 52 weeks, so I include those that are close or at this price level on a “Daily Watch List”. Then, I select those that I would be willing to add to equity portfolios if they fall a bit more during the trading day. Your actual “Buy List” changes every day in both symbol and limit price.

You will need to apply consistent and disciplined judgment to your final selection process, but you can be confidant that you are choosing from a select group of higher quality, well-established companies, with a proven track record of profitability and owner awareness. Additionally, as these companies gyrate above and below your purchase price (as they absolutely will), you can be more confident that it is merely the nature of the stock market and not an imminent financial disaster… and that should help you sleep nights.

By the way, never say no to a profit when the upward movement equals 10%, and you’ll be able to do it again, and again, and again.

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