The path to successful investing
(An excerpt from the Motley Fool)
Investing is a motley endeavour, unique to each person stepping to the plate. The two most-labeled investing camps are “value” and “growth.” And for decades investors have debated the merits and drawbacks of one versus the other.
But the truth of the matter is that value and growth are really just two different sides of the same coin. As Warren Buffett has said: “The two approaches are joined at the hip. Growth is always a component in the calculation of value.”
Don’t worry too much about classifying your investment approach. The important thing is that you are investing, consistently.
There’s a fundamental truth that many new investors don’t understand: There’s no one single path to investment success. Rather, you can succeed with any of a number of different investing strategies.
That’s both a blessing and a curse. It means that looking for the Holy Grail of investing methods is a fruitless search, but it also means that you can seek out and find a certain strategy that will work best for you. To do so, though, it has to fit your own particular goals and needs. The strategy has to make sense to you, not just in your head but in your heart, and be something you can strongly believe not just when a rising stock market is making everyone money but also during the inevitable downturns that will put your discipline to the test. Here are three very different but equally effective methods of investing:
Value vs. growth investing
One of the longest-running debates among investors pits two popular investing philosophies against each other. On the one hand, the Great Depression spawned great interest in value investing, which remains one of the best-known and most-followed methods of choosing investments. Espoused by investing greats like Benjamin Graham and followed with great success by Warren Buffett, value investing has investors look for mispriced businesses that offer far greater true intrinsic value than their share prices would suggest. You can find those stocks in several different places:
- Often, great companies will fall short of expectations for a short period, causing many short-term investors to panic and sending the share price downward.
- Longer-term turnaround candidates tend to have periods during which their efforts are bearing fruit but the share price hasn’t yet responded.
- Many cyclical companies have natural upswings and downswings, yet investors nevertheless bid shares up and down based on most recent results.
On the other hand, growth investors aren’t content to look for beaten-down stocks. Instead, they focus on the most successful companies in their respective industries, especially those that have a competitive advantage over their rivals that’s likely to persist for the long run. High-growth prospects almost never resemble value-investing candidates, because growth stocks usually rise and sport ridiculous-looking valuations. Yet if the growth comes through, these stocks can deliver phenomenal gains to their early shareholders. Signs of the best growth stocks include:
- Visionary corporate leadership, often coming from the company founder.
- Strong product appeal, whether it comes from a well-recognized brand or an innovative application that creates and fosters its own demand.
- Outright scepticism from value-focused investors about apparently overpriced shares.
The third strategy takes both value and growth investing and finds the best characteristics of each. Pitting a high-growth investor and a value-focused investor against each other to come up with their best stock picks while analysing and critiquing their opponent’s selections can give you the best of both worlds.
Invest your way and succeed!
Investors can succeed with all three of these methods. Synthesizing value and growth has let investors diversify their holdings and benefit from both approaches.
All this goes to show that you can invest well with the stocks you like to follow — whether they’re value, growth, or both. Choosing the strategy that you’re most comfortable with should yield you the best investing results.
And ultimately, the best way to make any investing strategy succeed is to buy great companies and hold them for the long term.