Growth investing or value investing which one is right for an investor. Growth at what price and when the company invested as a value pick will make it happen?
There are many approaches to investing.
No doubt all of them works.
The question isn’t what approach works and what doesn’t.
For some investor growth investing approach works more than value investing whereas it is vice versa for others.
So let us define both first.
What is Growth Investing?
Growth investing approach is to find companies, which are expected to grow at a much higher rate than their peers. It is a well-discovered story by the market, and so the price of the stock is relatively higher compared to its peers.
Investors typically profit from an increase in earnings of the company but not so much for the expansion in the price to earnings multiple in the market.
The great example can be investing in companies like HUL or Colgate or Emami etc. where the company is available at a much higher price to earnings compared to its volume growth. In a correction, investors consider investing in the company, and so the stock price doesn’t correct too much.
Investors can’t expect to invest in companies already trading at 40, 50 or 60 PE to have any further expansion in it but as the business grows steadily, the share price of the company will continue to move higher.
What is Value Investing?
Value investing approach is to find value in the stock at the current prices based on the calculation of future growth prospects. It may not be a very high growth phase for the company, but at the given price, slightly lower growth still offer a great value at the current price.
The main focus is on the increase in “price to earnings” ratio of the company going forward along with an increase in the earnings.
Often investors compare the growth and the current stock price of the company. If it is lower than the fair value of the stock as per the calculations, it is a buy.
Growth Vs. Value Investing
Growth investors always have a dilemma – Growth at what valuations?
As an example, HUL is trading 60 times its current earnings whereas it has a volume growth in single digit.
So at what price to earnings, one can consider investing in the future growth of HUL. What if the environment or the business deteriorates?
A value investor, on the other hand, takes the risk of investing in future growth assuming it is a value at the current price.
But value investors also have the dilemma – When the company will get into the next growth phase? What if it doesn’t?
So when it comes to growth or value investing, it isn’t only one of them works.
Both works.
What works more for you and your state of mind as an investo?.
No one else will be able to tell you what will work for you. It is you who can and will have to decide over time what works for you and what doesn’t.
I am more of a buy and forget kind of investor. I like to see the EPS of the company increased more than the price because I don’t have plans to sell. If earnings increases, I will have more dividend. When the market corrects, the earnings will protect the downside and turning my portfolio into the red.
As an example, Pidilite is one of my portfolio holding since 2016. I had the questions in the DIY forum if I letting it off in the correction of 2018.
I have an obvious reply for them when I purchased it in 2016 at around ₹700, the PE was about 45. Now at my purchase price, it is 35. So I am all good as long as the company is increasing its earnings at a decent rate. I don’t need to consider anything else because over time; the stock will make EPS equal to the price I paid for each share.
It is a growing company that has proved its metal for the past decade, and I don’t see any foreseeable reason why it can’t continue doing the same for the next decade as well.
Why not Growth + Value Investing?
Wait for high growth companies to correct and provide value. It is when investors make the most out of their investments.
Pidilite at ₹700 in 2016 at 45PE was a growth investing more than value investing. But again, it also corrected from high of ₹800 at that time.
A 10% growth rate, and 40+PE value investor may not consider.
More money is lost in waiting for the correction than in an actual correction, but if you follow Warren Buffer, he purchased financial and banking sector stocks in the financial crisis itself.
Again, it is not about being a growth or value investor only but a mix of both.
I have Pidilite and Page Industries in my portfolio, but I have a heavy allocation to Pharma and auto sector because we have issues in the US focused Pharma company because of strict USFDA guidelines and demand issues the Indian auto sector.
Time will tell if I make it or break it. It will be a good learning experience not only for me but also for my blog readers.
Again I will give ample time to my Pharma portfolio to be conclusive. At least 3 to 5 years from now before I consider any sectoral churn. Yes, I moved out of Jubilant life science because of the news promoter demanding a royalty for no reason but then allocated the amount in the Natco Pharma, in the Pharma sector only.
Final Thoughts
Don’t be a growth or value investor for the sake of it. Be in the market to make money.
I invest in some companies where I find good growth opportunity like Page Industries, Pidilite Industries.
Then I find Value in some of my core portfolio holdings like Lupin, Natco Pharma or Divi’s Lab when it was available in 3 digits.
Further, I have a mix of Growth + Value Investing in companies like Zydus Wellness and Amara Raja Batteries.
So you don’t need to choose either a growth or value investing approach. It can be a mixture of both in a single investment or portfolio as a whole.
But remember one thing, never try to find value in companies which aren’t making a consistent profit for an elongated period. Don’t invest in the hope of a turnaround. They seldom happen. If it happens, let it happen for an elongated period. You will have ample time to invest after the turnaround has happened. Always keep an investment checklist ready to avoid such non-profitable, high debt, low margin business.
Your final one paragraph sums everything about value investing Shabbir. Thanks for sharing that. Keep it up.
Glad you like it.