The Game of Investing, Vol. 13
We’re examining 2 of the most common investing strategies — growth and value — to help you better understand which approach works best with your unique goals and trading style.
Our expert today is Jamie McDonald, host of Real Vision’s Investor Tutorials.
- “There is no one strategy that is more likely to make you money than any other,” says Jamie. “But there are certain environments where certain strategies are more likely to flourish.”
In this issue, we’ll cover 3 things:
- Value investing — why it’s popular and how it works
- Growth investing — how it differs and why it’s all the rage
- How different market conditions and environments favor each style
Welcome to the Game
Welcome to The Game of Investing, a bi-weekly newsletter bringing you “aha” moments and actionable lessons from Real Vision experts. No matter your level of expertise, markets are tough — which is why we all have to put in the work. Ultimately, the game of investing is a competition with yourself. Our mission is to help you navigate the path to success. Prepare to level up.
Let’s get started.
LEVEL 1 — Value Investing
Championed by legendary investors like Warren Buffett and Charlie Munger, value investing focuses on uncovering undervalued stocks that have the potential for long-term price appreciation.
Regardless of sector, value investors look for companies that the market is underestimating — “stocks that are trading below their intrinsic value,” says Jamie.
- Intrinsic value is also called book value — aka the value of the company’s books.
- Value investors use fundamental analysis to assess a company’s health and buy stocks at a discount relative to their book value.
🔑 This style requires contrarian thinking and excellent patience. It can often take years for the market to realize that a stock is undervalued, so value investors must trust their research and thesis.
LEVEL 2 — Growth Investing
Growth investing thrives on the idea of a company’s future earnings potential.
Growth investors invest in the stocks of companies whose earnings are expected to increase faster than their sector or the overall market.
- Instead of valuing the present, growth investors analyze projections like forward earnings and sales multiples (aka price-to-sales ratio).
Even if a company is currently unprofitable, the market often places high value on future profitability. Growth investors try to profit off the momentum that accompanies this narrative.
- This style is more subjective than value investing as it relies heavily on market sentiment and speculation.
- Some examples of growth sectors are cloud computing, biotech, and e-commerce.
🔑 Ultimately, growth investing is sexy because of the potential for exponential returns, but it can be risky. Growth investors must accept that many of their stocks could fail, and a long time horizon is necessary to realize those lofty expectations.
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LEVEL 3 — Ride the Waves
Value and growth performance all depends on the various stages of the business cycle.
Value investing shines during times of uncertainty or downturns.
- When investors become risk averse, companies with good fundamentals and a consistent track record offer a margin of safety.
Meanwhile, growth investing thrives when sentiment is bullish and optimism reigns.
- Hopeful investors are more eager to take on risk and buy companies with the potential to become the next Amazon, Tesla, or Nvidia.
But buyer beware: market dynamics can alter the path of these strategies…
- During times of economic uncertainty, high inflation or rising interest rates, growth is vulnerable and value shines.
- But after a recession, growth can become coveted because profits are scarce.
- And when rates fall and risk appetite rises, growth soars while value keeps churning.
🔑 The takeaway: No matter your investing goals, understanding how your style fits in the macro landscape is pivotal. Familiarizing yourself with both growth and value techniques will allow you to be a more nimble, effective investor.
Thanks for reading. In our next issue, we’ll go deeper on how to discover what type of investor you are — and how to profit off it.
See you then.
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