|
The key to becoming a successful stock investor is to know the
difference between a great investment and a bad investment. Many
investors assume that great companies are great investments, but
this is not always an accurate assessment. Sometimes, a
wonderful business can make a lousy investment.
Most stock investors can be classified into two investment
styles: value and growth. Value investors utilize an investment
style that favors good companies at great prices over great
companies at good prices. These investors use such valuation
measures as price-to-book ratio, price-to-earnings ratio, and
dividend yield to determine the attractiveness of an investment.
Growth investors invest in companies that are growing their
earnings and/or revenue faster than the industry or the overall
stock market. These companies usually pay little or no
dividends, instead preferring to use profits to finance future
expansion and growth. Value investors prefer to own companies at
good prices, and growth investors prefer to own great companies
and price is a secondary issue.
Which style is better? It depends on the investor. Stock
investors with a lower tolerance for risk should consider
investing a larger portion of their portfolio in value stocks.
Investors with a higher tolerance for risk should consider
investing a larger portion of their portfolio in growth stocks.
However, investors who want to avoid under performing the stock
market as whole should always invest at least a small portion of
their portfolio in both investment styles.
Over the long term, value has outperformed growth, but from time
to time growth has outperformed during the short term.
Stock investors should be aware of the following:
1. The stock market rewards different styles at different times.
2. Value investors tend to be buy-and-hold investors, and growth
investors tend to be more short-term oriented.
3. It is very difficult to determine which style will outperform
in the short-term.
4. The variance between performance of value and growth styles
can be very large during short time frames.
5. For some growth stocks, growth never does come. Eventually
the share price falls.
6. Some value stocks are cheap for a reason - they are bad
stocks and they deserve to be cheap.
Overall, the best investments are those companies that able to
grow profits and add shareholder value. These companies have
traditionally been value companies. Investors who prefer to
select their own stocks should consider a value approach and
complement these investments with a growth mutual fund. Remember
that selecting the wrong growth company is not as forgiving as
selecting a value company erroneously, as the market correction
in growth stocks in early 2000 showed us.
About the author:
Daniel Reed is the author of "How to become a successful stock investor"
, visit his website "http://www.funinusa.com" for more stock
trading information.
|
