What is growth investing?
An investment style that is primarily focused on capital appreciation is known as growth investing. Those who follow the strategy of growth investing as known as growth investors. Growth investors focus on companies that show signs of above-average growth rates. The difference between the average investor and a growth-oriented investor is that the latter will focus on investing in companies with signs of growth even if their share prices are exorbitant in comparison to their price-to-book ratios, and other such metrics.
Value Investing vs Growth Investing Strategy
Now that we understand the growth investing definition, how different it is from value investing? The short answer: there is a significant difference even though people refer to both types of strategies interchangeably. When contrasted with value investing, growth investing may involve choosing a company that has yet to reach its full potential but is showing signs of growth. Value investors choose companies that may not be showing any sign of growth but possess an inherent value that is yet to be seen by the market.
Hence, the fundamental assumption with value investing is that inherent value beats all other factors that make companies successful on the market. With growth investing the assumption is that companies that grow fast show the strongest signs of earning potential. Sometimes value investing requires you to stay invested in a company for years before it takes off. In other cases, value investors might actually lose a lot of money as a company’s brilliant market plan just didn’t end up coming to fruition. Growth investors, on the other hand, only put their funds into companies that are already rapidly growing, although many might still be in their infancy.
Both investment styles — the value investing as well as the growth investing strategy — require incredible amounts of research. For growth investors, the research requires finding a company that is gonna grow rapidly and eventually compete with larger companies in its field. Similar to value investing, a growth investor takes a higher risk by investing in a company that is still in its infancy rather than going for a pre-established company that is likely to give returns.
The reason that this higher risk is taken by the growth investor is that such companies have the potential to grow beyond the market average. This leads to the potential for higher returns. While larger companies pay out their profitable earnings as dividends to their shareholders, growth-oriented companies will often reinvest these earnings into the growth of the company. Such companies are growing more and more popular over time as investors see the value in rapid growth as a portable investment strategy.
“Growth at a reasonable price”
Earlier, a pure growth investing strategy looked more like seeking out growth in companies at any price. This meant heavy investments at the potential cost of a company’s rapid growth being short lived. Now, this strategy has been replaced with the growth at a reasonable price strategy which seems to be a much more attractive option for anybody dipping their toes into growth investing.
The growth at a reasonable price strategy was popularised after the dotcom bubble burst at the turn of the century. This strategy blends together aspects of both value investing and growth investing to find the most lucrative investment strategy for investors who do not want the high risk associated with pure value or growth investing. By blending both strategies together, investors who employ this strategy seek out stocks that they are certain will deliver above-average growth without being too much of an expense for the investor. Hence, by combining the high performance with value investing, investors are able to mitigate some of the risks associated with value investing.
Ascribing a high share price to a specific stock in the hopes that it will maintain its rapid growth is much riskier than choosing moderately priced stocks that are showing signs of growth. IN case the stock doesn’t perform up to an investor’s expectations, and the share price plummets, lesser money is potentially lost. Both strategies have their pros and cons but it is more fashionable for investors today to seek out investments that trade at reasonable valuations but are growing rapidly.
Growth investing is for investors who prefer taking on the risk of investing in a company that is showing signs of growth in its infancy. It requires immense research as it can turn out to be a high return strategy, similar to value investing.