Growth or value investing in these times?

Growth or value investing in these times?
Written by Celine Tan
Tuesday, 02 June 2009 18:00

In the investment world, there are two broad investment styles -- value and growth investing. With stock prices around the globe experiencing major corrections in the past 18 months, should you be applying the value investing strategy?

Value investors seek stocks that they believe has been undervalued by the market. Some undervalued investments, which suffered acute fall in prices, are the result of overreaction to negative developments and this does not correspond with the investments’ long-term fundamentals, says Sharifatul Hanizah Said Ali, managing director of RHB Investment Management Sdn Bhd. “In such a scenario, value investors are likely to profit when the value of the assets, in which they invested at deflated prices, recovers.”

However, in the event that the investment suffers a drastic change in fundamentals -- from bad to worse, it will remain cheap for a long time. “Therefore, it’s crucial for one to be aware of the nature of your investment. This is even more so when it comes to value investing as some of these investments are under-researched and information may not be easily accessible,” says Sharifatul. Another common risk in value securities is liquidity risk, she adds.

Meanwhile, growth investors invest in companies that have a high-growth story, even if the price appears expensive. “While most growth investments yield decent returns [usually in line with the broad market], value investments can potentially yield exponential returns in the right market cycle [like small-cap stocks rally],” says Sharifatul.

You need to make a judgment call in determining the approach to your investment. “If you are of the opinion that the market recovery will be protracted and eventually spill over to the entire market, then it may be worth investing in value investments. Otherwise, it’s more advisable to invest in growth investments as they should move ahead of value investment,” says Sharifatul. “In essence, we prefer equity growth investments that are undervalued. We are also of the view that values are emerging among blue chips and fundamentally strong companies with good track records, prudent management and strong brand names. These established corporates would be the driver of growth and lead the economic recovery.”

Regardless of your approach, in deciding the intrinsic value of an investment, you are making certain assumptions, for instance, the expected revenue and earnings, says Chen Fan Fai, chief investment officer of Kenanga Asset Management Sdn Bhd. “If your assumptions are wrong, your valuation will be totally out – and this is where the risk lies.”

However, unit trust fund investors should not make the mistake of assuming that unit trust funds that have fallen in price appear to provide value. “In essence, a unit trust is a portfolio of assets. You cannot simplistically say that this unit trust fund, which has fallen from RM1 to 50 sen, is a good buy, compared with the one that has dropped from RM1 to 90 sen [both funds having the same investment mandates],” says Teoh Kok Lin, managing director of Singular Asset Management Sdn Bhd.

Alternatively, one can scrutinise the individual holdings of the stocks or bonds in the unit trust portfolio to gauge its value, says Sharifatul. “Assuming if the stocks are largely undervalued stocks and trade at steep discounts to their fair values, it is likely that the fund trades at a discount too or adopts a value investing strategy.”


http://www.theedgemalaysia.com/personal-finance/15495-growth-or-value-investing-in-these-times.html

Nature of Growth and Value Stocks

Nature of Growth and Value Stocks

These designations are not inherent in the products the firms make or the industries they are in. The terms depend solely on the market value of the firm relative to some fundamental variable, such as earnings, book value, etc.

The stock of a producer of technology equipment, which is considered to be an industry with high growth prospects, actually could be classified as a value stock if it is out of favor with the market and sells for a low market-to-book ratio.

Alternatively, the stock of an automobile manufacturer, which is a relatively mature indsutry with limited growth potential, could be classified a growth stock if its stock is in favor.

In fact, over time, many stocks go through value and growth designations as their market price fluctuates.

The literature often showed value stocks beating growth stocks. What does this mean?

As many stocks go through value and growth designations as their market price fluctuates, this implies that stocks become priced too high or low because of unfounded optimism or pessimism and eventually will return to true economic value. It definitely does not mean that industries normally designated as growth industries will underperform those designated as value industries.

There is no question that investors always should be concerned with valuation, no matter which stocks they buy.

Mistakes to Avoid - Swinging for the Fences

Swinging for the Fences

Loading up your portfolio with risky, all-or-nothing stocks, is a sure route to investment disaster. In other words, swing for the fences on every pitch.

For one thing, the insidious math of investing means that making up large losses is a very difficult proposition - a stock that drops 50% needs to double just to break even.

For another, finding the next Microsoft when it's still a tiny start-up is really, really difficult. You're much more likely to wind up with a company that fizzles than a truly world-changing company, because it's extremely difficult to discern which is which when the firm is just starting out.

In fact, small growth stocks are the worst-returning equity category over the long haul. Why?

First, the numbers: According to Professor Kenneth French at Dartmouth, small growth stocks have posted an average annual return of 9.3% since 1927, which is a good deal lower than the 10.7% return of the S&P 500 over the same time period. The 1.4% difference between the two returns, has an absolutely enormous effect on long-run asset returns - over 30 years, a 9.3% return on $1,000 would yield about $14,000, but a 10.7% return would yield more than $21,000.

Moreover, many smaller firms never do anything but muddle along as small firms - assuming they don't go belly up, which many do. For example, between 1997 and 2002, 8% of the firms on the Nasdaq were delisted each year. That's about 2,200 firms whose shareholders likely suffered huge losses before the stocks were kicked off the Nasdaq.

Also read:
Compounded Effects of Market Underperformance

Growth Stocks Paradox

David Durand, "Growh Stocks and the Petersburg Paradox," The Journal of Finance, vol. XII, no. 3, September, 1957, pp. 348-363.

This classic article compares investing in high-priced growth stocks to betting on a series of coin flips in which the payoff escalates with each flip of the coin.

Durand points out that if a growth stock could continue to grow at a high rate for an indefinite period of time, an investor should (in theory) be willing to pay an infinite price for its shares.

Why, then, has no stock ever sold for a price of infinity dollars per share?

Because the higher the assumed future growth rate, and the longer the time period over which it is expected, the wider the margin for error grows, and the higher the cost of even a tiny miscalculation becomes.

Growth Stocks: Searching for the Sprinters

Growth Stocks: Searching for the Sprinters

by Douglas Gerlach

Investors who focus on growth try to predict which companies will grow faster in the future -- faster than the rest of the stocks in the market, or faster than other stocks in the same industry. If you're successful in buying a company that does grow faster than other companies, then it's likely that the price of that company's stock will increase as well, and you can make a profit.
(My comment: Provided you did not pay too high a price to buy it.)

The stock of a company that grows its earnings and revenues faster than average is known as a growth stock. These companies usually pay few or no dividends, since they prefer to reinvest their profits in their business.

Peter Lynch primarily used a growth stock approach in managing the Magellan mutual fund. Individuals who invest in growth stocks often prefer it because their portfolio will be made up of established, well-managed companies that can be held onto for many years. Companies like Coca-Cola, IBM, and Microsoft have demonstrated great growth over the years, and are the cornerstones of many portfolios. Most investment clubs stick to growth stocks as well.