Investment Strategies: Growth and Value Investing

What Is an Investment Strategy and How It Helps to Achieve Financial Goals?

An investment strategy is a systematic method of deploying money in the stock market and/or other asset classes. It is based on specific objectives, rules, procedures, etc. The various investment strategies take into account the individual’s financial goals, investment time horizon, risks involved, expected returns, costs involved, tax efficiency, regular returns, if any (for example, dividends or distributions), etc.

The investment strategy is aligned with an individual’s financial goals, such that it helps in achieving them. It aims to earn better risk-adjusted returns that are in line with the returns expected to achieve the individual’s financial goals.

Now that we understand what is an investment strategy, let us look at its types.

Types of Investment Strategies

There are various types of investment strategies, each having a specific purpose. Some of these include the following.

1) Growth Investing

It involves investing in shares of companies expected to grow their sales and profits faster than peers and the overall markets. As the company grows at a higher rate, most of the profits are reinvested in the business to fund the high growth. As a result, growth companies give little to no dividends. The investors are focused on capital appreciation in such companies. The share price usually rises as the company delivers good financial results and thus creates wealth for shareholders.

As these companies grow at a higher rate, their shares usually trade at a higher valuation. The market gives a premium to such companies. As a result, the price-to-earning (P/E) ratio, the price-to-book (P/B) ratio, and other valuation metrics are higher.

Growth companies do well when the business/economic cycle is on an upswing. With the overall expansion in the economy, the market also expands, thereby creating room for companies to grow. Also, small to mid-size companies have the potential to grow at a faster rate due to the lower base.

When the business/economic cycle reverses, it can hit growth companies hard. As the economy slows or contracts, it hurts the demand for goods and services of growth companies. It can result in their share prices nosediving.

Growth investing is a high-risk, high-return potential strategy. It is suited for investors with an aggressive risk profile. In a bull market, the strategy can create wealth for investors. However, in a bear market, it can leave investors with losses.

2) Value Investing

It involves identifying and investing in stocks that are trading below their intrinsic value. These companies are usually valued by the markets lesser than their actual worth. As a result, their share prices trade at lower valuations. Value investors identify such stocks, invest in them, and hold them till the market recognises the true value of these companies. At times, value stocks test the patience of investors as their share prices may not move much or move stay range-bound for several months or years.

Over a period of time, as these value companies continue delivering good financial performance, the market realises their potential. At this stage, more research firms start covering these companies with buy recommendations. As more and more investors rush to invest in these companies, their share prices go up benefitting the value investors who invest in the initial stage.

How to Pick the Best Investment Strategy for You?

There is no single best investment strategy that suits every investor. An investment strategy can be chosen based on the investor's financial goals, risk tolerance, the market phase (bull/bear phase), the state of the economy, the investment time horizon, the expected return, etc.

The growth investing strategy is recommended for an aggressive investor looking to take a high risk to earn high returns. They can invest in high-growth companies and benefit from the growth in their share prices. The value investing strategy is recommended for investors looking to take a relatively lower risk and invest in companies trading below their intrinsic value. They can invest in value companies and wait for the market to recognise their potential and benefit from the growth in their share prices.

Case Studies of Successful Investment Strategies

Let us look at some examples of growth and value investing techniques wherein the companies have done well, and shareholders have benefitted.

In the current market scenario, some of the growth companies that have done well include the following.

1. Domestic manufacturing companies into manufacturing of mobiles, electronics, consumer durables, etc., riding on the high demand and benefits from the Government PLI schemes
2. Travel and hospitality companies capitalising on the growing incomes of individuals and the flourishing tourism industry
3. Defence companies sitting on huge order books as the Government looks for import substitution and increase exports
4. New age companies like e-commerce companies that are growing fast as the internet penetration increases and easier payment methods like UPI gain adoption.

Now, let us look at some examples of value companies that have done well recently. A few years back Public Sector Banks and other PSUs were considered value stocks as they were trading at cheap valuations. Some PSBs were trading at less than one time price-to-book (P/B) ratio. At that time, these PSBs were saddled with bad loans, low capital adequacy, reporting financial losses, lacking in digital banking measures, etc.

Most PSBs have cleaned up their balance sheets, raised capital, and reported good profits in the last couple of years. Seeing their good financial performance, the market has recognised the value of these PSBs, and their stock prices have gone up. Some of the PSBs and PSUs have been multibaggers, with their share prices multiplying several times. For example, the share prices of some PSU defence companies and railway stocks have done well recently and created wealth for shareholders.

Which Investing Technique Should You Choose?

To choose an investing technique, you should consult an investment expert. It is better to leave it to the expert to determine which investment style suits you. They will analyse your financial goals, investment time horizon, risk tolerance, and other factors and accordingly recommend an investment technique that best suits your requirements. 

The investment expert will design your diversified portfolio with a mix of large, mid, small, and flexi-cap funds that will help you achieve your financial goals.

FAQ's

Are Growth and Value Investing the Only Two Strategies?

Apart from growth and value investing, there are other good investment strategies. Some of these include core and satellite investing, active and passive investing, dividend/income investing, factor investing, etc. However, this article focuses on growth and value investing, and the discussion on other investment strategies is out of the scope of this article.

Is It Important to Choose One Strategy From Growth and Value Investing?

No. You can even combine the growth and value investing strategies to build an all-weather investment portfolio.

How Do I Know Whether the Investment Strategy That I Have Chosen Is Good?

Consult your investment expert once every six to twelve months and review the performance of the investment strategy. Compare the returns with your expected rate of return, the benchmark index, the overall market, etc. If the returns are better than these, the investment strategy is sound. If not, the investment expert can recommend changes in the investment strategy.