Should You Invest In The “Down And Dirty” Or The “Up And Coming”?
December 5, 2014
What is intelligent investing? Unfortunately, there is no quick answer to this question. This is because there are maybe aspects of investing that requires an investor to make certain assumptions when investing. A company which I am interested in might not be a company that might interest you. This is because we have to be very comfortable in investing in the company that we selected, if not, we might panic when things did not pan out the way we envision it. This will lead to making the worst possible mistake at the worst possible time, ie. Selling an investment when we should be buying more. So before you start investing, why not spend some time to ask yourself, what kind of investor are you?
There are numerous strategies out there for investors, but I will focus on the two main type of investors. Bear in mind that I do not think that one strategy is better than the other, they are merely different. Many investors prefer to investing in companies that are “down and dirty”, or the more mainstream classification is value-based investors while there are others who prefer to invest in “up and coming” companies. These investors are also known as growth investors. The main difference between the two is the perception each group has when investing.
Down and Dirty
Value-based investors tend to focus on companies that are beaten down in the market, most likely facing a crisis at the moment. The idea behind investing in such companies is to find the point where the company is close to a turnaround inflection point. This means that value investors feel that when they invest in such a company, they are expecting that things will not get any worse from that point. Thus, they are protected on the downside, because the market is extremely pessimistic about these companies and even a slight improvement might means big profits for investors. The key takeaway is that these investors focused mainly on the downside of the business and invest when they believed the downside is very much protected, so it is very hard for them to lose money on that investment.
Up and Coming
By contrast, growth investors look at companies that are growing rapidly or disrupting industries and creating new industries through their businesses. These investors focus mainly on the upside of things and look at companies that will grow much faster than the whole market. They feel that the potential of the companies will be big enough to justify the investors to invest into them. Typically, growth investors tend to invest in more companies compared to value investors because of the uncertainty of the future. Especially the future of companies and industries that are being disrupted or non-existence yet. Therefore, one or two failed investment would not affect their portfolio as a whole as the winners in the portfolio should far compensate the investors for it.
Value In Action
So which investor are you? It depends on how well you can take losses. If you are not able to withstand the stress of losing 90% of your investment in one stock, then maybe growth investing is not suitable for you. Or if you not comfortable owning sub-par businesses which are near its death, maybe value-based investing might not be for you. Having said that, there is no fixed rule that say you have to be over the other. Many investors might very well have both value and growth companies in its portfolio.
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All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and does not in any way represent those of his employer and other related entities. Stanley Lim does not own any companies mentioned above.
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