Growth Investing
Growth Investing, on the other hand is a little bit different
cup of tea. The best way to explain growth investing is to put it into direct
contrast with value investing. Value investors are focused on the current price
of the company and its current intrinsic value, always shopping for a bargain.
Growth investors, on the other hand are interested in the future potential of
the company they are looking at, while not really putting much emphasis on the
current price. They don't mind paying more for a company than its intrinsic
value, because they believe that the company will grow way beyond their
valuations anyway.
For example, growth investing could be compared to a team
manager trying to recruit Michael Jordan. The manager would have to pay Jordan
a lot of money, but as long as he or she keeps winning games and putting people
in the seats, it's worth it. In addition, if he or she trains more, he or she
can get better. However, value investing on the other hand looks for players
that are good but don't have Jordan's hype. Therefore they would have to pay
them less, and get a great player at a bargain price. However, there is always
the possibility that they get what they paid for and the player really is
bad.
Growth investors are interested in growth stocks and those
tend to be companies that grow a lot faster than others. It makes sense then
for growth investors to be primarily concerned with younger companies that have
a lot of potential for growth. They base their philosophies on the theory that
growth in earnings and revenues will make the stock price go up. Growth
investors realize all of their profits through the increase of the stock price
rather than dividends paid out to them, because the companies they invest in
usually do not pay dividends.
For example, Tony's wife, Tanya is a growth investor. He or
she decides to look at shares of Google. They are currently trading for around
$530 a share, up from about $430 last quarter before the company's earnings
report came out. She wants to buy several shares of the stocks because after
evaluating the company, she strongly believes that the company can go up in
price even more, or perhaps the stock will split. She ignores Tony's advice to
wait until the share price drops a little bit, and makes the purchase. Google
continues to go up in price and Tanya makes money, making sure to tell Tony
that she was right.
Other types
There are two other major types of investing that are worth
mentioning but merit no further discussion in this paper due to its scope. The
first is income investing where the investor picks companies based on their
dividend yield and the income from the shares comes not from capital gains, but
only from dividends. The other type is called speculation and is where
investors look at chart patterns and have very little interest in the company
they are buying. This is a very risky way to trade and requires looking at
stock price changes on minute to minute levels.
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