Tahoe-Truckee Market Beat: Different styles of stock investing
November 16, 2015
There are some distinct styles of stock investing. While some people consider them to be opposites, legendary investor Warren Buffett once said, "Growth and Value investing are joined at the hip."
The value style is well known and was pioneered by Benjamin Graham and David Dodd who wrote "Security Analysis" in 1934, during the throes of the Great Depression. Ben Graham later penned "The Intelligent Investor," which is a very worthwhile book to read.
Warren Buffett has followed the value style throughout his career and his funds employ the value approach. Value investing basically consists of buying stocks that are trading at a good price relative to their valuation for some reason. Some of the metrics that are considered include the price to earnings ratio, the price to book ratio and the price to free cash flow.
The growth style consists of buying stocks that may appear to be expensive but have substantial projected earnings growth rates. In the late 1990s, as the dotcom bubble was forming, technology stocks were trading at very high multiples because of the internet explosion.
The NASDAQ topped out in March of 2000 when it went over 5,000. The bubble burst after that and the NASDAQ just got back to the 5,000 level this year.
However, some of the tech companies of those early dotcom years have dominated and performed very well. Others were priced so high they never bounced back.
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Peter Lynch, noted fund manager and author of, "One Up on Wall Street" favors a style known as GARP, which stands for growth at a reasonable price. GARP practitioners combine the growth and value styles in an attempt to locate stocks that have both attractive growth potential and are trading at reasonable valuations. They look at metrics like cash flow and earnings momentum.
Which style is best for you depends on several factors like your age, income, net worth and overall risk tolerance. In a diversified portfolio, it can be a good idea to combine stocks or funds from each of the different styles to achieve some balance.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.