Value Stock Investing vs. Growth Stocks  – Whiteboard Wealth #9

 

You’ve heard of Warren Buffet I assume. Warren Buffet is perhaps the most notable value stock investor. But what is a value stock and how do you invest in them?

Most investors don’t understand the difference between types or classifications of stocks they invest in. It’s easy to think “I want to buy growth stocks because they’re going to grow more”. That may sound corny, but it’s true. If you don’t live in the financial arena you probably don’t really understand what value stock investing is relative to growth stock investing.

 

What Is Value Stock Investing?

 

Value stock investing is simply investing in equity securities which are trading at a compressed – or lower – price relative to other stocks. Put simply, you’re buying stocks which are out of favor or depressed relative to something that everyone else has bid up and is trading at a much higher premium.

But how do you know it’s compressed or at a premium you ask? We judge that based on financial ratios and metrics like the price of the stock relative to the:

  • Book value of the company
  • Company earnings
  • Company earnings and growth
  • Dividend payable

Essentially any financial metric can be used to determine value stocks versus growth stocks. Keep in mind, they’re value stocks or growth stocks RELATIVE to each other.

 

Value Stock Investing Returns More Over Time

 

In Whiteboard Wealth #10 I’ll show you the statistics behind the performance of value stocks and growth stocks. Spoiler Alert: value stock investing performs much better relative to their growth stock counterparts over LONG periods of time. Not a month or a year, but over LONG periods of time.

Do value stocks always outperform? OF COURSE NOT! In fact right now value stock investing has been out of favor for nearly 5 years. Does this mean you’re losing money? No, what it means is the strategy is underperforming growth stock investments – and by a noticeable margin.

Now the layman would think – it’s time to invest in growth stocks – they’re outperforming and have been for the last several years. The astute investor isn’t rattled however. The astute investor knows this is actually a risk/reward story, and value stocks seem and feel and are “riskier” relative to growth stocks. This is why they have such strong LONG TERM outperformance.

Unless the world has changed to reward safer more steady and growing companies trading at expanded premiums MORE than their riskier depressed and cheaper value counterparts, the value story will eventually come back into play. After all consider this: how expanded can those growth stock premiums really get before they start to compress as well and investors start looking for bargains again in the form of value stock investing?