Value and Growth Investing Methods
For many people who start investing, it is difficult to figure out the most important criteria in making their investment decision. In addition to knowing basic investing vocabulary, it is also helpful to understand some of the basic investing methods. Star investors like Warren Buffett and Cathie Wood are famous today for their value and growth approaches to investing, respectively.
Warren Buffett is one of the most famous investors worldwide and is known for his strategy of value investing. Buffett is the CEO of Berkshire Hathaway and has more than half a century of experience. His net worth now amounts to over $115.5 billion. One of his secrets to success is that he started investing when he was unimaginable eleven years old. However, that is not realistic for most people to achieve since interest in finance often develops at a later stage. That being said, the lesson to be learned is that there is no time to lose when it comes to starting to invest. Success most likely comes in the long run. Buffett’s success also lays in his acquisition of 60 companies which now account for Berkshire Hathaway. Buffett first contact with value investing was through his former mentor Benjamin Graham at Columbia Business School. He first applied and defined this strategy.
The core idea behind value investing is to first determine the intrinsic value of a company and then compare the value of the company to the current stock market price. When also comparing the stock price to that companies’ competitors, one can see if the stock is underpriced. Then, a decision can be made as to whether a company is worth investing in.
When looking at a company from a value investing point of view, one must first look at the management and fundamental quality of a company before looking at the price. One should be able to see whether the company has a leading, experienced team, and if they have a track record of overcoming challenges. A long term strategy is key with this investment method since one must believe the quality of the business behind the stock will push up the price; short-term price falls mean value investors can buy the same business at a cheaper price.
Growth investing, meanwhile, is all about a fast approach to get to the desired price target. Obviously, like the name already predicates, the most important criterium is fast growth in comparison to the market, apparent through higher than average returns. Companies which show these characteristics are often younger firms in futuristic markets, such as electric vehicles. Because growth companies tend to be younger, investors often do not get dividends when investing in companies like this; rather, the company’s profit is used to reinvest back into the company.
Each of these investment methods offer a different way to view a business and its investment decisions. One can look for stocks selling at discounts based on a fundamental analysis, or one can look for a stock that is poised for rapid price growth. These strategies are often used by successful investors in the financial world, especially women like Cathie Wood. Stay tuned for the next finance article that will delve into inspiring women in the world of finance.