Are You a Value or Growth Investor? Take This Quiz
If the tortoise and the hare were investors, their investing styles would be pretty obvious. The tortoise would buy "value" stocks, and the hare would be a "growth" stock investor.
Value stocks are often cheaper, undervalued stocks of companies that nonetheless have long-term earnings potential. Meanwhile, growth stocks tend to focus on sectors such as technology or health care, where more rapid appreciation and price to earnings ratios are common.
Each offers a different timeline for investors, who may differ in their risk capacity. Are you a tortoise or a hare — a value or growth investor? Take our quiz:
1. Can You Wait 31 Years?
If you plan to remain fully invested for a long time, you're likely to win the race — as the tortoise does in Aesop's fable — with a slow and steady approach as a value investor.
In a comparison of value and growth stock market indexes by Wiley Global Finance, the 31-year annualized return of growth-oriented large-cap U.S. stocks was 9.91%, while similar value-oriented indexes outperformed them with an average return of 11.66%.
An initial $10,000 investment would grow to $187,071 with the growth stocks, and $305,169 with the value stocks. In other words, long-term returns were 63% better for the value stocks.
2. Do You Want to Be Part of the "In" Crowd?
If you enjoy talking with coworkers and friends about the latest tech stock you bought (and hopefully profited from in a big way), then a growth stock is what you want. If you're willing to take a chance on the next big thing, then you're a hare.
Facebook, Amazon, Netflix, and Alphabet (nee Google) are examples of companies with rapidly growing revenue. Those four companies were expected to have annual revenue gains of 23%–40% during the last three months of 2015, according to Bloomberg data in the New York Times.
On the other hand, aging companies such as Cisco, Oracle, and Intel are value stocks that may not grow as fast in price as growth stocks.
3. Do You Mind Paying More for a Stock?
If you don't mind paying more for a stock that is expected to grow quickly, then a growth stock could be worth your money.
But if the thought of potentially overpaying makes you nervous, then you're a value investor who would rather get a deal on an undervalued stock.
One way to determine if you're overpaying or getting a deal is to look at price-to-earning ratios, or the P/E ratio.
A stock could be a value stock if it has a lower price-to-earnings ratio, meaning it has a lower price per share relative to the company's earnings per share. But take note: A low P/E ratio doesn't necessarily mean a stock is undervalued or a good buy — it could just mean it's a bad stock. You'll need to understand whether the company's long-term prospects are better than its low P/E ratio suggests in order to determine whether it's a worthy buy. By contrast, growth stocks have higher P/Es and thus a higher price per share because the stock price is expected to grow faster.
Netflix, for example, had a recent P/E of 301.4. Oracle had a P/E of 17.17.
4. Do You Plan to Make Significant Withdrawals From Your Portfolio Soon?
If you have major expenses such as buying a home or paying for college in the next five years, then you probably don't want to be a value investor.
While value stocks are known for outperforming over the long term, they're likely to underperform the market for shorter periods. Value companies can face slow growth and possibly declining revenues and profits over the short term, causing their price to drop over a few years.
While growth stocks are no guarantee of a short-term profit, they're more likely to lead to it than value stocks are.
Planning for large, quick profits from the stock market is risky. If you expect to need that money within the next five years, then at least a mix of value and growth stocks or another type of investment may be the best route.
Determining if you're a tortoise or a hare — a value or growth investor — is a personal choice that can largely be based on your risk tolerance. These types of investments don't usually go up together at the same time — one will usually rise while the other drops — so a long-term plan and a mix of both could turn your portfolio into a hybrid of the tortoise and the hare.
Aesop may not be so fond of such a combination, but your investment portfolio might thank you.
Are you value or growth?
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