If you are also an investor then you might come across the problem of selecting the perfect style of investing for yourself that align with you financial goals. With many investing styles, there are 3 of the best investing styles those are value style investing, growth style investing, and momentum style investing.
Value style Investing, growth Style Investing, and momentum Style Investing are the three of the best styles of investing. Whichever style of investing that you are choosing there is an important need to know the difference between each of these styles of investments, and what are each of these styles?
Lets talk about three popular investing styles that most investors are aware of but do not understand clearly. And those popular investing styles are. First, Value Investing. Second, Growth Investing. Third, Momentum Investing. You must have heard from many people about growth stocks. Few people find value stocks or other types. In this blog, we will cover the Definition of Value, Growth & Momentum
Value style investing
Let us start with the Value investing style. The Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic value.
Value investors actively look for stocks they think the stock market is underestimating they believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond to a company’s long-term fundamentals. This offers the chance to increase profit by buying discounted priced stocks.
Value investors later sell these stocks when the price approaches fair value or intrinsic value. There is no universal standard for calculating the intrinsic value of a company.
However financial analysts build valuation models based on aspects of a business that include- First, Qualitative factors. Second, Quantitative factors. Qualitative Factors include factors like
- Business Model
- Governance & Target market
- Quantitative Factors include Financial ratios
- Financial statement analysis
- Balance Sheet strength
- Cash-flow robustness & Earnings growth
Growth style investing
Now let us move to the next investing style, and that is growth investing. Growth investing is a kind of investment style that is majorly focused on the strategies to increase the investor’s money. Growth investors invest in growth stocks. Growth stocks are young or small companies whose earnings are to increase at an above-average rate compared to their industry sector or the overall market. This style of investing is attractive to many investors as buying stock in emerging companies can provide returns if they turn out to be successful.
This style has two main risks. If the growth in the emerging business stops or slows down, the market perception of the company changes drastically. Growth stocks are generally valued far higher compared to value stocks and hence, the margin of safety is considerably less.
Growth investing has the potential to offer multi-bagger returns. As a growth investor, one continues to hold on to a growth stock for a long time if the earnings continue to deliver as per expectation. And this long-term holding results in extraordinary returns for the growth investors. Key factors a growth investor looks at:
- Historical earnings growth
- Future earning potential
- Profit margins
- Cash conversion of profits
- Return on Equity
Momentum style investing
Now we come to the third style of investing, Momentum Investing, momentum investing involves buying stocks showing upward-trending prices and selling stocks with downward-trending prices. In this, trends can persist for some time, and that it’s possible to profit by staying with a trend until it ends, no matter how long it may be.
Momentum investing involves abiding by a strict set of rules based on technical indicators that dictate market entry and exit points. Some popular technical indicators used are:
- Relative Strength Index
- Money Flow Index
- Moving Averages Convergence Divergence (MACD)
- Bollinger Bands
Difference Between Value style Investing vs. growth Style Investing vs. momentum Style Investing
| Particulars | Value Investing | Growth Investing | Momentum Investing |
|---|---|---|---|
| Premise | Intrinsic Value is most important | Earning power is paramount | Price captures everything |
| Reinvestment | High | Low | Very High |
| Risk | Very High | Moderate to Low | Low |
| Margin of Safety | Very High | Moderate to Low | Intrinsic Value is the most important |
| Horizon | Based on the reduction in the difference between price and value (can be short, medium, or long term) | Very long term if the business continues to perform | Price movement decides the investing horizon. Generally, very short term, but sometimes long term as well |
| Multi-bagger Opportunities | Rare, as you end up selling stocks that come closer to the intrinsic value | High, as you hold on to the stocks that continuously see growth in earnings | Moderate as short-term trend reversal may lead to selling stocks |
Conclusion
Concluding remarks. The difference between all three types of investing is not very clear in practice. Legendary investors with decades of experience often say that all investing is value investing. What they mean by this is that if there is a high-growth company, you estimate its value by factoring in the high-growth prospects in the future.
But you should ideally invest only when you see those growth stocks trading at a discount to their value. Similarly, in momentum investing, if you focus on business momentum rather than the stock price, you come closer to value investing & growth investing.
