One of the writer previous articles talked about “buying a fair company at a great price, or buying a great company at a fair price”. This is the exact point that differentiate value investing and growth investing.
Value investing is to buy a fair company at a great price. Their valuation is often at a relatively low point, which comes with the PE ratio between 5 to 10. These companies still have a strong fundamental but their growth will be limited, as trend may not be on their side. However, since their valuation is very low, there are not much risk when investing in these companies, and the return may be exceptional as they have a lot of growing potential. Value investors will often buy the stock when they are undervalued and sell their shares when they are overvalued.
Growth investing on the other hand is to buy a great company at a fair price. Their valuation is often higher, which will lie between 30 to 80. Some companies from this category may have a strong fundamental, but their borrowings will also be high as they tend to borrow money from banks in order to expand their business. That being said, there are also growth stocks that are net cash companies and still constantly growing. The risk when investing in growth stocks is higher as uncertainties are higher. If the growth is sustainable then you got yourself a fantastic investment, but if let say their expansion failed to kick in, the company may suffer losses, and investors will also suffer the capital losses. Growth investors will often buy the stock when their potential is just revealing, and will sell the stock when their growth reached a bottleneck.
The writer will not say which is better, but it all depends on the risk you are willing to take. Obviously, value investing will have a lower risk but may have a lower return than growth investing. Some examples can be provided for both cases, both MAGNI and MASTER are considered as value investing as their PE ratio is lesser than 10, and have a strong fundamental. For growth investing, GREATEC and UWC can be considered as it, since their PE ratio is higher than 70 but it is also obvious that their profit is improving, and their forward PE ratio will eventually be lowered down.
In short, both types of investing are considered as long-term investing, but each of them consists of their own risk and reward. Besides, a stock with high PE ratio is not necessary a growth stock and stock with low PE ratio is also not necessary an undervalued stock. It is all up to their fundamental, only stocks with strong fundamental can be used for long-term investment, or you will loss all your invested money over time.
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