Value Versus Growth Investing: What’s A Growth Company?

Are you feeling good about value companies?

Remember, those are companies that seem to be undervalued, maybe because of a temporary setback, or companies that are more mature and stable. These companies tend to produce a lot of profit and might be more stable, but they are not expected to grow like crazy.

Let’s compare a value company with a growth company.

Here’s what you’re getting with a growth company. Typically, growth companies take all the cash they make, and they dump it back into the company so it grows even more. They are not interested in giving their profits to shareholders. No way. They think they can do much better with the money by researching new products, advertising, trying to get new customers, and simply growing the company.

When a company starts, it’s a growth company.

It’s small and trying to get customers and get bigger. But even some older companies are considered growth companies. Companies such as Amazon.com. It’s been around for over 20 years, but it still takes the money it makes and plows it back into the company so it can grow even more.

Because investors like growth, these growth companies tend to have a higher valuation, meaning they are more expensive than other companies. So, there can be more risk with growth companies.

Most investors are not growth or value investors; they are growth and value investors.

They use a combination of the two investing styles in their portfolio because there are times when the market, meaning the majority of investors, favors one style over the other. When this happens, you see a divergence between the two types of companies. For example, back in the late 1990s, almost all investors couldn’t get enough of growth stocks. They loved growth stocks. More stable, mature, value companies? No way! High growth stocks? Oh, yeah. Bring ‘em on!

So you had growth stocks do really well for a period of time. And then they didn’t. Then after the dot-com crash, people were like, “I just lost a bunch of money. Who cares if a company grows fast? All I care about is stable and predictable returns. All I care about are value companies.” Yes, just like that, you had the whole investment community, who days earlier loved growth stocks and disliked value stocks, completely shift their mindset.

As an investor, you will probably have both growth and value stocks.

But when you look at your asset allocation, it’s important to see what percent of your stocks are growth versus value. If you notice that 90% of your stocks are growth and only 10% are value, you’d better have a good reason if Warren Buffett asks.

The proceeding blog post is an excerpt from Get Money Smart: Simple Lessons to Kickstart Your Financial Confidence & Grow Your Wealth, available now on Amazon.