For many astute investors, there are often two schools of thought on stock selection; value or growth. Many investors ascribe to the value school because they like the idea of buying out-of-favor stocks that might have had a temporary set-back but could offer a lot of upside. They are more likely to pay dividends and may also be more appealing to those who are risk-adverse.
The growth stock camp believes that the stocks they choose offer growth because of profit or revenue growth. These companies reinvest earnings back into the company. The growth camp is often willing to take on a little additional risk and forego dividends in the hopes for a respectable upside. They often also need to be a little more risk tolerant and ride out more potential volatility.
The tug-of-war between these two investment philosophies have waxed and waned over the years, as institutional and retail investors take sides during any market cycle. Upside potential, earnings and risk profiles all play into the decision to choose one approach over the other.
Many famous investors have fallen on either side of these strategies with Warren Buffett and John Neff on the value side and Thomas Rowe Price, Jr., a fan of the growth approach. Investor Peter Lynch would adapt whichever of these approaches worked best at the time.
The U.S. stock market continued its climb until late September. That is when the trend started to reverse and more downside volatility entered the markets. There was a correction in February with a subsequent recovery. Volatility continued, but with a steady rise starting in the Spring with bouts of downward pressure. After September 20, the rollercoaster ride saw more peaks and troughs until it plunged in December. Some end-of-year rallies saw some recover after Christmas with a record-breaking day and increase of more than 6 percent between December 26 and 28.
Riding the Wave; Big Tech
During much of the stock market run-up in 2018, growth stocks have beaten value stocks. Since 2007, growth has outpaced value stocks by a wide margin. That hasn’t been consistent in every year, with value outpacing growth in 2012 and 2016.
Through mid-July of 2018, the growth sector has outpaced value by more than 11 percent. Much of the credit for this lead can go to the popular tech stocks that have exhibited tremendous rallies.
It is believed that rising interest rates can benefit value stocks and interest rateshave been creeping up.
Value stocks are often favored by those who are less certain about the trajectory of the market in the future.
Investors who include some investments utilizing both of these styles can benefit by having a diversified portfolio. After all, nobody can look into the future, so bringing some balance to a portfolio considers any eventuality.
Warren Buffett, the value investing devotee once said; “”Be fearful when others are greedy and greedy when others are fearful.” Only time will tell.