Growth versus value investments

Growth versus value investments

1. Introduction

As an investor, it is often essential to keep in mind that there is often more than one way of making money in a stock market. Value investing and growth investing ate the most recent process of recognizing stock investing. Both strategies seek to offer the best possible returns, so the real differences between them are actually the approach that each take. Growth investment is often for an investor looking to commit a portion of a portfolio in a considerably long terms investment. Growth investment, therefore, does not give a quick or short terms return but in the long run, does pay off very well growth stock for investment share in companies with a relatively strong momentum and are worth waiting for, on the other side, value investment are companies whose stocks prices do not necessarily reflect on their worth value. The value investor often goes for shares that they do believe that are having an under-value by the market yet have a strong potential upside.

Growth investment does focus on a better than averages earning for such investor they have the hope in stocks and funds that they are likely to beat the market. Value investing, on the other hand, identifies assets that are undervalued in the market with the hope of a good bargain when the values shots in the market. According to Byun et al., (2015), investments in growth and stock have been contemplated among academics and practitioners.  In growth investments, the investors much always keeping mind that the stocks should often be parts of the long-term strategy in the process of buying the shares or choosing the company that they would like to invest in. The performance of the values stocks which are often defined as companies with higher book to market ratios against the growth stock defined as companies with low book-to market-ratios is less known and are usually controversial( Trevino,)

2. Literature map and discussion

The discussion that prevails about the chosen topic in the present’s academic literature can be divided under key headlines that are in line with the research objectives. Here we will focus on growth and value investing, the two critical processes that should be recognized in stock investing. Both of these market strategies always seek to provide the best returns; therefore, the real difference between the two is in their approach.

Fundamental analysis of growth and value investing.

Benjamin Graham developed value investing in a style that was adopted by Warren Buffet, a successful historical investor. It is based on the fundamental analysis, which is quantitatively comparing a company’s stock price to various measures of financial strength and promise. Growth investing is a fundamentally different style that always seeks to identify tomorrow’s exceptional business success. It has always been argued which value produces higher returns over the long term. The battle between value and growth investing has been on for many years, with each side offering statistics to support its arguments. Some studies have, however, shown that value investing has outperformed growth over extended periods on a value adjusted basis. Value investors, however, argue that the short term focus can often push stock prices to lower levels which in turn creates excellent buying opportunities for value investors.

New investors have always discovered that there are several broad strategic approaches to investing. At one level, investors often choose between fundamental investing and technical investing. The theoretical analysis might be used to find stocks with strong fundamentals and technical analysis could be used to identify the best price to pay.  Growth investors tend to look for companies that are growing at a fast rate which increases their revenues and profit quickly. And they are always expected to keep growing faster than even the market average. It is because of this anticipated performance that many growth stocks come with high price-earnings in comparison with value stocks. Growth investing is usually associated with new and upcoming companies. The growth is always expected to be in just capital gains since dividends are rarely paid by fast-growing companies.

The essence of value investing and growth investing.

The development of the stock markets and the system of investment information, with the increased volume of knowledge of individual investors, create new strategies and forms. The value investing is an investment paradigm which always stems from the ideas of Benjamin Graham and David Dodd. The essence of value investing is to buy shares at a lower price than their actual value. An investor that is looking to commit a portfolio for a very long term should look into growth investing. However, these investments do not always give quick returns, but when they do pay off.  The growth stocks are the shares within those companies with significant momentum; they use every resource to expand their product or service to generate more revenue and therefore dominate that particular market.

The growth stocks do have the potential of offering higher returns compared to value stocks, and they also tend to have more vitality. The risk is the sudden price drop in the capital due to negative earnings or lousy reputation about the company. The value investments are always defined as those companies whose stock prices do not reflect their net worth. They are always analyzed by comparing the firm’s intrinsic value to its current market value. The inherent value of a firm is still determined by the evaluation of the fundamental aspect of the firm that includes its business model, financial statements, management and the competitive situation.

Characteristics of the value investing and growth investing

The growth stocks often represent companies that have demonstrated better than average gains in earnings and are expected to continue delivering excellent levels of profit growth. They are higher priced than the broader market; therefore, investors are always willing to pay a higher price to earnings multiples with the great expectation of selling them at higher prices as the company continues growing. However, the value stocks are lower priced than the broader market, the critical idea that lies behind the value investing is that stocks of good companies will bounce in time whenever the real value is recognized by the investors.

The growth stocks have high earnings growth records, the earnings of some companies are likely to be depressed during periods of slower economic improvement, growth companies are expected to potentially continue achieving high earnings growth regardless of the economic conditions. Value investors work on the fact that value stocks are created due to investors overreacting to the recent company problems like disappointing earnings or legal issues.

Lastly, growth stocks are more volatile than the broader market; the risk involved in buying a given growth stock is that its high price could sharply fall on any negative news about the company. However, the value stock carries somewhat fewer risks than the broader market, as they take time to turn around, the value stocks are likely to be more situated to longer-term investors and are also expected to carry more risk of price fluctuation than the growth stocks. Growth stock tends to cost more than the value stocks; the expectation of rapidly increasing stock prices causes investors to bid up the rate of growth stocks.

Suitability of Growth Investing vs Value Investing

Both of these approaches have their benefits; a combination of the growth and value investing in the long term period is not an uncommon sight as it has the potential of high returns and the risks involved. This approach enables the investors to benefit from the economic cycles where the scenario may either favour value or growth stocks. This, however, ensures a smooth return on investment over the course of time. When it comes to the historical performance of the two respective sub-sectors of stocks, the results seen must be evaluated in terms of time horizon and the amount of volatility and the risk involved in order to achieve them.

The value stocks are theoretically considered to have a lower risk level and volatility that is associated with them because this is because they are found among those companies that are well established. If they do not return to the target price that the investor predicts, they may still offer some capital growth that pays dividends as well. Meanwhile, growth stocks usually refrain from paying out dividends and instead will reinvest retained earnings back into the company to expand. The probability of loss in growth stocks for investors can be higher mainly if the company is not able to keep up with growth expectations.

3. Research questions, theories, and methods

A comprehensive review of the kinds of literature on the subject shows this the researchers used mixed research methods. This makes much sense in measuring the difference which exists between the growth and value investments. All the 12 articles reviewed does focus on the aspect of the difference between the two forms of investments together with the factors which rut in this difference. The literature is based on the findings from the findings of the study.

4. Critique of two well-used research methodologies in the reviewed literature
5. Byun, J., Choi, H. S., & Choi, P. M. S. (2015). Sentiment, growth and value investments: evidence from Korean Stock Listings. Investment Management and Financial Innovations, 12 (3), 142-148.

How was the research applied?

The research was conducted through an empirical analysis process where the authors did experiments a house race that exists between the fundamentals and behavioural views of growth stock returns. Using the thirteen-year sample of the Korean exchange KRX listed firms, the researchers were able to the positive relationship that exists between the value premiums and the stoke market sentiments. The research has established that there exists a positive kind of connection between the favourable relations value premiums and the stock market sentiments.  The researchers did offer practical answers from the analysis to the question of how to value investments and growth investments can earn favourable long-run premiums in time of the pessimistic and the optimistic investor sentiments.

The research was vital in establishing the actual value of the returns that often come concerning each kind of investment. The empirical study analysis that was conducted by the author Byun et al. (2015) was based on the difference in the value of returns from the premiums both in the long run that comes from the growth and the value investment. This was compared to the information based on the KRX listed companies whose stocks were listed. The difference between the two types of investment was analyzed based on what are the element of the premiums returns from various companies in the KRX and the result indicated a positive kind of relationship between the two.

How the methodology was deployed to contribute towards theory and research

According to the analysis of the article, the research methodology immensely contributes to the development of research and the assumption that surrounds the element of growth and value investment. The methods used in the study directly leads to the development of empirical research. It relates the two-element of the study that is the returns of the growth and the value investment perfectly well. The researchers in the study of the KRX articulates the comparison between the two types of investment which is the basis of this research. The methodology used in the study brings a clear difference between what each kind of finance entails.

The methodology used also illustrate by comparing the value of the companies that use growth and profits investment the difference between the two investments. The researchers examine the several elements of the investment with the companies that were listed in the KRX and developed a vital aspect of the relationship between the two investment methods. Each was designed with an accurate understanding of the investor sentiment in mind to bring out the differences between the two aspects of investments.  Through the sourcing of the financials and the counting database of the KRX listed companies from 2000 through 2014 and also sampling of the non-financial companies on the mainboard (650) and the KOSDAQ, the researchers can consolidate the main findings of the research and come up with effective result for comparison of the difference between the growth and value investment, the critical basis of the research

Gap left for future analysis

Even though the study is capable of bringing out the actual differences between the growth and the values investments through the empirical analysis of the KRX listed firms, several gaps are left which will all for future studies. The first gap in the research for future investigation is the actual cause of the disparity that exists in premiums return from each kind of investment. The researchers in the article did not bring out the purpose of the difference that is seen between the two methods of investments. Second, the research does establish whether the disparity is a result of the market shifts or any other factor during the process of investment. The study only reveals the gap in the premiums results associated with each kind of investment. However, there exists a difference of as to why one type of investment yields better returns in the long run and why the other yield good profits in the short terms basis. This is the other gap for future analysis or research that ought to be carried out. Lastly, the inquiry does not list the advantage of the disadvantages associated with each kind of investment. There is a need for future study to demonstrate the benefits and the problems that are associated with each type of investment.

2. Emm, E. E., & Trevino, R. C. (2014). The changing risk-return characteristics of value and growth investing. Journal of Financial Planning, 27(11), 55-60.

How was the research applied?

The researcher in the article outlines the changing risk-return characteristics of the growth and the value investment through a review of the portfolio returns that were computed by Fama and French (FF). The researchers did analysis the changing risk-return characteristics of the growth and value investment through an empirical analysis of the result that was developed or computed by the Fama and French. This is a vital tool for the research was an analysis of the two organization with Clear understanding and relation to the critical research question the study, therefore, was applied with a precise examination of the element of value investment in comparison to the growth investment. According to the researchers, they wanted to verify if the return for the value investor is higher than that from growth investment. This formed the primary basis of the study.

How the methodology was deployed to contribute towards theory and research

The research used the empirical analysis of the study that was conducted by a different organization on the aspect of return on both growth and value investment. According to the researches, this methodology aims at establishing the disparity of the difference in the value of returns both on the two type of investments. However, the major focus based on the study is aimed at establishing a fully formed opinion and the main research question being that are being tested are on whether the returns on whether value investing yield a higher average retunes compared to the growth investing from the study or the report by Fama and French (FF) which was presented to in the 2013 SBBI. The methodology used in the study clearly develops an understanding of the investment return from the findings of the changing risk characteristic associated with the growth and the values investment. Due to the difference like the risk associated with the two stakes,

Gap left for future analysis

Despite the success in the article and its immense contribution toward this research. It leaves several gaps and or questions unanswered which will be investigated in future. The research fails to examine the actual cause of the disparity on the average return that is associated with growth and value investment in relation to the characteristics of the growth and value investment. With the focus of the article being the disparity between the two aspics, it is however quite technical to link the discrepancy between the value and the growth average return with the role that is played by the changing characteristics which the study mentions. This gives an open chance for further study or research in the future. Lastly, this study leaves behind the gap on to the question of which is the popular trend on the value and growth return as a result of the individual investment type characteristics.

Conclusion and the scope of research

A thorough analysis of the literature from 12 different sources on the growth verse growth investment reveals that in most cases growth investors are attracted to organization or companies that are expected to grow quite fasters either through revenues or cash flows or by the element of profits. As growth is often a priority for companies, they do reinvent their earnings and by benefits to expand into new workers and acquisitions. On the other hand, value investing is about finding fortunes in the rough companies whose stock value prices do not necessarily reflect on their worth. As such investors in this form of investment seek trading at a share price that is considered a bargaining value. The value funds for this investment do not in any way emphasize on growth above all. However, investors do benefit from the payment of dividends. From the analysis of the two forms of investments, it is not convincing to point out which kind of investment is beneficial over the other. This is because each type of investment, according to the literature review, is rewarding in its way.  The scope of the research is broad to look into all the factors and the characteristic of each type of investment. This develops an in-depth understanding of which factors affects a particular kind of investment.

References

Byun, J., Choi, H. S., & Choi, P. M. S. (2015). Sentiment, growth and value investments: evidence from Korean Stock Listings. Investment Management and Financial Innovations, 12 (3), 142-148.

Emm, E. E., & Trevino, R. C. (2014). The changing risk-return characteristics of value and growth investing. Journal of Financial Planning, 27(11), 55-60.

Prondzinski, D., & Miller, M. (2018). Active Versus Passive Investing: Evidence From The 2009-2017 Market. Journal of Accounting and Finance, 18(8), 119-143.