Friday, 21 November 2008

A Look at Growth, Income and Value Investing

Investing Philosophies - Part One
A Look at Growth, Income, and Value Investing
By Ken Little,

Developing an investing philosophy may seem like an academic exercise, however over time, it will help shape your thinking about the types of stocks that work for your portfolio.

This first of a two-part series looks at the three main investing philosophies:

Most investors fall into one or a combination of these investing philosophies.

Growth Investors

As the name implies, growth investors look for the rising stars. They are interested in companies that have high potential for earning growth. High earning growth invariable leads to high stock prices – at least in theory. Growth investors are willing to bet on young companies that show promise of becoming leaders in their industry.

The technology stocks, especially during the late 1990s, were the perfect example of growth stocks. Many of these young companies started with an idea and nothing more and now are large successful companies.

Of course, a great many more of those same technology companies started out with an idea and nothing more and ended up where they started. Which is to say that growth investing carries the risk that some of your investments are going to fail. As much as Americans like success stories, there are more failures than successes when it comes to market leadership.

Value Investors

Value investors look for the stocks that the market has overlooked. Value doesn’t mean cheap as in low per share price, but under priced relative to the value of the company.

These are stocks the market has passed over while chasing some other industry sector or more glamorous investments. The value investor looks for stocks with a low price/earnings ratio meaning the market is not willing to pay much in the way of a premium for the stock.

Of course, the value investor needs to make sure there in nothing wrong with the company that would warrant a low stock price other than neglect or market inattention. Assuming the company is solid, the value investor’s strategy is to buy and hold the stock, anticipating the future time when the market will recognize the company’s worth and bid the stock up to its true value.

Income Investors

Income investing is the most straight-forward of all philosophies and the most conservative. Income is the motivation and investors target companies paying high and consistent dividends.

People near or in retirement are fond of this strategy for obvious reasons. The companies that qualify for the income investor tend to be large and well-established. There is always some risk involved in investing in stocks, however this remains the most conservative of the investing philosophies.

If the stock price increases, that’s icing on the cake for the income investor who would probably trade some capital appreciation for a higher dividend.


These three investing philosophies take in a large number of investors, however it is not required that you fall purely in one camp or another. As a practical matter, you will likely modify your investing philosophy as your life circumstances change.

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