Do you know what your investment style is? You may not have given it much thought. However, gaining a basic understanding of the major investment styles is one of the fastest ways to make sense out of the thousands of investments available in the market today.
Investing are be classified into two different styles: growth and value.
Growth Investors focus on companies with increasing earnings, which they believe is the driving behind rising stock prices. They are less concerned with traditional valuation measures, dividend payouts, price-earnings ratios and other stock-selection tools.
Growth stocks generally have higher than average price-earnings ratios, price-to-book value ratios, and stock price volatility. However, they typically enjoy higher return on assets and equity. Growth stocks usually pay little or no dividends and use after-tax earnings to finance additional company growth.
Value Investors, in contrast, follow traditional measures of security valuation such as price-earnings ratios, price-to-book value ratios, and price-to-cash flow ratios (basically defined as earnings plus non-cash expenses, mainly depreciation).
They also look for hidden value. For example, assets that are worth more than those listed on the balance sheet, such as unique patents or products whose merits have not been recognized in the market place; or cash that, on a per share basis, represents a significant percentage of the stock price.
Warren Buffet, one of the most successful investors today, is a firm believer of value investing.
Both investment style have their merits, but as an investor, you should think carefully about which investment style is more suitable for you. Clearly defining the investment style that suits you, will help you select investments that you will feel comfortable holding for the long term.
If you need more advice on investment planning, contact your trusted FLA Organization Financial Planner for more information today!
