Value Investors vs. Growth Investors
Within the world of investors (not traders), there are typically two designations (i) value investors and (ii) growth investors. The objective is the same, make money. The typical investment is different. Value investors are known for trying to find cheap securities based on metrics such as price/earnings, price/book, etc. Value investors are considered in some ways to be like professional garage sale shoppers. Always looking for a good deal on something that someone else doesn’t like.
If value investors are garage sale shoppers, growth investors are more like luxury shoppers. They are willing to pay up for a great product because they believe it will continue to appreciate over time. To translate that into stocks, they are willing to pay more for a business with what appears to have great prospects. When we say “pay more” that means buying a company with a price-to-earnings (P/E) ratio of, say, 20 meaning you paid $20 for every $1 in earnings for a 5% "earnings yield". A value investor may want to invest at a P/E of 10 meaning they only want to pay $10 for every $1 in earnings for a 10% yield.
The reason a growth investor would pay a higher price is because she expects earnings to growth in the future. That P/E ratio of 20 she paid may end up being only 10 if the company doubles its earnings over the next year.
So that is how the world tends to think about investors, value or growth. In reality, the distinction is meaningless. Growth is an integral part of value. If you had two identical companies except one was growing its earnings 20% per year and the other wasn't growing at all, the growing company would obviously be worth more than the stagnant company. Whether the company is growing, stable or declining, all investors are trying to figure out what it is actually worth and then buy at a large discount to that intrinsic value. The reason is this:
Over the long run, stock prices revert to the intrinsic value of their underlying companies.
All the best,
Your Fortis Capital Management Team