1. What is the value investing and growth investing? What are the differences and relative merits?
Value investing is where investors identified misunderstood companies trading below fair market value and waiting for the market to acknowledge the inefficiency. This means that value investors would seize the opportunity to purchase an undervalued company knowing that, at some point in the future, the market would correct itself. Growth investing is when you invest in companies that have above-average growth characteristics. Investors are willing to pay a premium for companies where their future prospects were above average. Main difference is growth investing is investing in overvalued companies while value investing is investing in undervalued companies. Another difference is that growth investing is fast, you get your value quick. But with value investing, it requires patience. If you look at the business lifecycle graph, you can see that a growth company has more growth but less time while a value company is the opposite. Some relative merits to growth investing is that it placed an emphasis on identifying less-tangible characteristics, which might help predict future success. Investors would invest in technology companies that would have above average earnings early in their business lifecycle. Problems that growth investors face are higher risks and volatility and it’s difficult to predict how well the company will grow in the future. Some relative merits for value investing is that value investors take advantage of devalued assets that others would be afraid to invest in. Characteristics of of value stocks are that they come from companies that are mature and pay dividends to shareholders. Problems that value investors face is that they get below average returns, it takes longer, and investors could buy troubled companies.
2. What are GMO’s main arguments in favor of value investing?
GMO’s main arguments in favoring value investing is that these long term value investments are consistently outperforming growth investments. Finding undervalued investments could mean that there would be higher returns than the market average. Also value stocks represent companies that will be around for a long time. Their stocks would outperform the market average and convey a lower degree of volatility in the long term. In growth investments, sudden momentum changes can cause huge price swings. Value investments are more steady and consistent.
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