We show that as popularly used, these are flawed concepts. We demonstrate why, and offer an alternative. It is understood that growth stocks will generate faster-than-average earnings growth, and that stocks that trade of low multiples of some variable are cheap. Growth stocks Growth indexes typically use three variables to select stocks that are expected to generate superior future EPS growth: growth in sales per share over the last three years; growth in EPS over the last three years; and price momentum.

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Growth vs. Because the two styles complement each other, they can help add diversity to your portfolio when used together. Growth and value defined Growth stocks represent companies that have demonstrated better-than-average gains in earnings in recent years and that are expected to continue delivering high levels of profit growth, although there are no guarantees. The key characteristics of growth funds are as follows: Higher priced than broader market. Investors are willing to pay high price-to-earnings multiples with the expectation of selling them at even higher prices as the companies continue to grow High earnings growth records.

While the earnings of some companies may be depressed during periods of slower economic improvement, growth companies may potentially continue to achieve high earnings growth regardless of economic conditions More volatile than broader market. The risk in buying a given growth stock is that its lofty price could fall sharply on any negative news about the company, particularly if earnings disappoint Wall Street Value fund managers look for companies that have fallen out of favor but still have good fundamentals.

The value group may also include stocks of new companies that have yet to be recognized by investors. The key characteristics of value funds include: Lower priced than broader market. The idea behind value investing is that stocks of good companies will bounce back in time if and when the true value is recognized by other investors Priced below similar companies in industry.

Carry somewhat less risk than broader market. However, as they take time to turn around, value stocks may be more suited to longer term investors and may carry more risk of price fluctuation than growth stocks Growth or value Which strategy — growth or value — is likely to produce higher returns over the long term? The battle between growth and value investing has been going on for years, with each side offering statistics to support its arguments.

Some studies show that value investing has outperformed growth over extended periods of time on a value-adjusted basis. Value investors argue that a short-term focus can often push stock prices to low levels, which creates great buying opportunities for value investors.

History shows us that: Growth stocks, in general, have the potential to perform better when interest rates are falling and company earnings are rising. However, they may also be the first to be punished when the economy is cooling. Value stocks, often stocks of cyclical industries, may do well early in an economic recovery but are typically more likely to lag in a sustained bull market Growth vs.

Based on calendar-year returns from to Past performance is not a guarantee of future results. Index performance does not reflect the effects of investing costs and taxes. Actual results would vary from benchmarks and would likely have been lower.

It is not possible to invest directly in an index. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions. CS When investing long term, some individuals combine growth and value stocks or funds for the potential of high returns with less risk. This approach allows investors to, in theory, gain throughout economic cycles in which the general market situations favor either the growth or value investment style, smoothing any returns over time.

Value stocks are securities of companies that may have experienced adverse business or industry developments or may be subject to special risks that have caused the stocks to be out of favor. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy.

Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice.

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The Financial Times Guide to Value Investing Quotes

Despite their different investment choices, Simpson, now 81 years old, and Buffett in many ways have similar investment philosophies. Buffett so admired Simpson that he suggested at one time that the Geico CIO could step in should something happen to himself and Charlie Munger. For his part, Simpson said his smaller portfolio gave him an advantage over Buffett. Like Buffett, Simpson developed his investment approach through trial and error, evolving over decades. He was aiming for spectacular returns from a few star performers, hoping that he had guessed the future correctly. But through bitter experience he learned that good long-run results come from buying companies with established high performance rather than mere promises of future riches with low risk and at a low price.


Growth hits new high against value, and three stocks could ride next leg higher



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