Ask Colin

I have read recently the following comment, "In fact value stocks have outperformed growth shares for the past three out of five weeks after grossly underperforming for most of April and the beginning of May." This was in reference to US market. Could you please be so kind and explain what is the difference between the "value" and "growth" stocks? What parameters "decide" if it is "value" or "growth" stock? Can one stock change from "value" to "growth" and vice versa?

There are two main investment "styles" or philosophies that rule the world of investment.

One is called "value investing" and its originator was Benjamin Graham. The idea is that you identify quality companies that are selling for less than their fair value. You then buy them and sell them once the market has adjusted their price back to fair value or above. It has a great track record.

The other is called "growth" or "momentum" investing. At its most elegant, it is the identification of great companies that are growing rapidly. You buy them and prices continue to rise. At its ugliest it is simply buying what goes up, - the so-called "greater fool theory" because it is based on finding a "greater fool" later to buy it from you at a higher price. In fairness though, markets are driven by greed and profits can be made from trading trends. It works best in speculative phases of bull markets.

This is a big subject and it is part of a bigger subject of investing philosophies generally. There is a reasonably easy to understand brief discussion in Chapter 5 of Stocks for the Long Run by Jeremy Siegel, a book every serious investor should read.

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