There are many ways to take your money and invest it for the future. Many will argue whether it should be "blue chips", emerging markets, commodities or numerous of other asset classes. But within the many classes to which one can invest, there have always been to specific approaches to investing- value and growth. Now I don't recommend one over the other. In fact, a good portfolio will have value and growth within each of the major assets classes, ie. small cap value, small cap growth, etc. You will even find the opportunity to invest in many asset classes through a combination of both value and growth, which would be called a "blend" (small cap blend). But, to focus on the traditional sense of value and growth, that is what I will focus on in this post.
Let's start with value investing. Value investing is theoretically looking for stocks that are undervalued. This involves a strategy for selecting stocks that trade below their intrinsic value. It is most usually done by using some form of fundamental analysis which may incorporate the book value or price-to-earnings multiple of the company being analyzed. These analysts believe the markets overreact to both bad and good news which can cause for the price of the stock to be out of line with the long term fundamentals of the company. Investors can look at this as a way to profit if the price of the stock is under priced or possibly short the company if it is overpriced (shorting being a way to make money off the stock if the price goes down).
Warren Buffet, chairman and CEO of Berkshire Hathaway, is a well-known figure in value investing. His mantra has been to find an outstanding company at a sensible price. Over the last 25 years, his way of investing has put him at a level above all others when it comes to investing in value stocks. He taught under Benjamin Graham (founder of value investing) who is known for his "margin of safety" rule which basically classifies value investing as buying a company at a large enough discount to make up for any marginal error in the price. It is important to note that value investing is completely subjective. While they look at current assets/earnings of a company, most value investors place little emphasis on the future growth potential of a company.
Warren Buffet, chairman & CEO of Berkshire Hathaway
A growth stock is a company whose earnings are expected to grow at an above average rate compared to other companies in the same industry or the overall market. Those who invest in these stocks will presumably invest even though the price-to-earnings ratio may be higher resulting in a more expensive share price. However, seeking out a company due to an expectation of a future growth rate can lead to a potential liability within the growth style of investing. Leading up to the tech boom of the late 90's, many technology stocks were purchased based on speculation of future growth only to drastically drop in price. Therefore, growth investors have tended to follow a viewpoint of looking for companies with high growth rates priced at a reasonable valuation. This concept was adopted by Peter Lynch who managed one of the largest mutual funds in history- the Fidelity Magellan fund.
Although both styles of investing provide their own winning case, it is important to consider your own investment personality. This will include your risk tolerance, time horizon and personal objectives for investing. This way you can determine whether you are more a value or growth investor. Most experts will agree that it would be wise to be invested in a little of both. This goes back to the saying, "don't have all your eggs in one basket". Choose diversification, that's my opinion.
Below is a good link at how to be allocated based on your time frame until retirement- Source Morningstar: