An investor in a company has 3 sources of potential returns:
1. dividends,
2. exploiting the disparity between stock price and intrinsic value, and
3. long-term growth in intrinsic value.
Benjamin Graham said that the stock market is a voting machine in the short run and a weighing machine in the long run.
Implicit in this statement is the idea that the price of the stock and the intrinsic value of the company will tend to coincide over the long term.
Value Investing
An investor in a value (no growth) company has 2 sources of potential returns:
1. dividends,
2. exploiting the disparity between stock price and intrinsic value.
However, it is possible that the stock price may remain well below the intrinsic value for a long period.
If a major component of the expected return from a stock is the narrowing of the disparity between the stock price and the intrinsic value, a lengthy delay in closing that disparity would diminish the return from that stock.
Growth Investing
An investor in a growth company has 3 sources of potential returns:
1. dividends,
2. exploiting the disparity between stock price and intrinsic value, and
3. long-term growth in intrinsic value.
Far too often, growth companies choose not to pay a current dividend. This practice reflects management's opinion that retained earnings are better invested in growing the business.
For those fortunate growth companies that can concurrently grow and generate free cash flow, a dividend can be an important source of return for investors.
Eventually, all growth companies become mature. If the management has developed the business properly so that the company has a significant and sustainable free cash flow, a substantial dividend payout can, in come cases, exceed the original purchase price of the stock.
A careful investor in growth companies should always seek to exploit any disparities between stock price and intrinsic value, especially at the time of purchase.
Growth Investing versus Value Investing
"Its better to buy a wonderful company at fair price than a fair company at wonderful price."
While a value company investor must pay below intrinsic value in order to achieve a reasonable return, a growth company investor must seek to purchase the stock at a price of fair value or less.
If you buy stock in a growth company with an intrinsic value of $10 a share and the intrinsic value grows by 15% per year, in 5 years the stock will be worth $20; in 10 years, it will be worth $40; and in 15 years, it will be worth $80 in intrinsic value.
Even at a 10 percent annual growth rate, after 7 years, the company's intrinsic value would have grown from $10 per share to $20. After 14 years, it would have grown to $40; and after 21 years, it would have grown to $80.
1. dividends,
2. exploiting the disparity between stock price and intrinsic value, and
3. long-term growth in intrinsic value.
Benjamin Graham said that the stock market is a voting machine in the short run and a weighing machine in the long run.
Implicit in this statement is the idea that the price of the stock and the intrinsic value of the company will tend to coincide over the long term.
Value Investing
An investor in a value (no growth) company has 2 sources of potential returns:
1. dividends,
2. exploiting the disparity between stock price and intrinsic value.
However, it is possible that the stock price may remain well below the intrinsic value for a long period.
If a major component of the expected return from a stock is the narrowing of the disparity between the stock price and the intrinsic value, a lengthy delay in closing that disparity would diminish the return from that stock.
Growth Investing
An investor in a growth company has 3 sources of potential returns:
1. dividends,
2. exploiting the disparity between stock price and intrinsic value, and
3. long-term growth in intrinsic value.
Far too often, growth companies choose not to pay a current dividend. This practice reflects management's opinion that retained earnings are better invested in growing the business.
For those fortunate growth companies that can concurrently grow and generate free cash flow, a dividend can be an important source of return for investors.
Eventually, all growth companies become mature. If the management has developed the business properly so that the company has a significant and sustainable free cash flow, a substantial dividend payout can, in come cases, exceed the original purchase price of the stock.
A careful investor in growth companies should always seek to exploit any disparities between stock price and intrinsic value, especially at the time of purchase.
Growth Investing versus Value Investing
"Its better to buy a wonderful company at fair price than a fair company at wonderful price."
While a value company investor must pay below intrinsic value in order to achieve a reasonable return, a growth company investor must seek to purchase the stock at a price of fair value or less.
If you buy stock in a growth company with an intrinsic value of $10 a share and the intrinsic value grows by 15% per year, in 5 years the stock will be worth $20; in 10 years, it will be worth $40; and in 15 years, it will be worth $80 in intrinsic value.
Even at a 10 percent annual growth rate, after 7 years, the company's intrinsic value would have grown from $10 per share to $20. After 14 years, it would have grown to $40; and after 21 years, it would have grown to $80.
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