Value? Growth? Both!

Value? Growth? Both!
By Julie Clarenbach January 2, 2009 Comments (0)
http://www.fool.com/investing/general/2009/01/02/value-growth-both.aspx?source=ihptclhpa0000001

The same company can be both a growth and a value stock. Value investing, after all, wants to buy companies selling at a discount to their intrinsic value. Growth investing wants to buy companies that will grow their bottom lines -- and presumably your investment -- many times over. But there's nothing excluding fast-growing stocks from being undervalued. That's why Warren Buffett himself said that "growth and value investing are joined at the hip."

Putting the puzzle together The other piece that gets lost in the "value vs. growth" debate is this: You shouldn't be buying only one stock anyway. You should be building a portfolio. And that portfolio should be -- say it with me now -- diversified.

One premise of diversification is that different kinds of stocks do better in different market environments. Putting together assets that don't move in the same direction at the same time will create the best chance for high returns with lower overall volatility. Notice how each of these different investment classes go into and out of fashion at different times:

Large Caps
Small Caps
International
REITs

So when you're picking stocks, make sure you choose from a variety of categories:

• Large-cap stocks, being more established, typically endure less volatility; small-cap stocks, on the other hand, are more risky but also have the potential to be more rewarding.
  
• Value stocks provide downside protection and a reasonable assumption of an upside, while growth stocks take advantage of room to double, triple, and quadruple in value.
  
• Domestic stocks take advantage of the unparalleled power of American industry -- but emerging economies, which don't always move in lockstep with developed economies, have room to grow much faster than ours.
  
• While they have may have a reputation for being slow growers, dividend payers have historically boosted performance for investors: From 1960 to 2005, about 80% of the market's returns came from reinvested dividends.
  
• Diversifying across industries ensures that your portfolio isn't wiped out from unforeseen economic, political, or natural disasters. While the credit crisis bankrupted numerous financials and pushed department store stocks down an average of 64% in 2008, discount stores, biotech, and waste management have held their own.

Your portfolio should have all of these: large caps and small, value stocks and growth, domestic stocks and international, as well as some dividend payers -- all from a variety of industries.

Whoa -- how many stocks are we talking here? It won't necessarily take dozens of stocks to diversify in all of these ways, because, as I mentioned earlier, the same stock can fit into multiple categories.

Take "technology, media, and financial services company" General Electric (NYSE: GE) as an example. Where would it fit on this list? It has a market cap of $170 billion, Morningstar considers it a value stock, it currently yields 7.9%, and while it's based in Connecticut, half of its revenue comes from outside the United States.
Or what about tiny China Fire & Security (Nasdaq: CFSG)? It's a $190 million growth company selling fire-protection products to Chinese corporations.
Every single stock you consider is going to fit many different categories, and thus will diversify your portfolio in multiple ways. The key is to fit your holdings together to achieve meaningful diversification, so that you can enjoy strong returns with minimal risk.

The Foolish bottom line

As important as diversification is, it's secondary to buying stocks worth holding for the long run.

But as you consider the world of stocks worth holding, you want to make sure you're blending them together for a portfolio that can earn you great returns while weathering all kinds of markets.