The fundamental style of investing can itself be divided into many sub-styles. Since it entails studying a company’s financial data and other company- / sector- or economy-related information, a fundamental investor can use a combination of these to formulate his ‘own’ stock-investing style.
For instance, an investor may give more weightage to certain financial parameters and club them with his subjective judgement of the sector dynamics to pick a stock. Though the styles of fundamental investing are many, the more popular ones are growth investing and value investing. Growth investing seeks to invest in those companies that have ample room to grow and expand. Such companies tend to belong to booming industries. Think of the information-technology sector in the last decade. Indian IT companies were growing at a feverish pace. They were the most sought-after by investors. Given their ‘privileged’ status, growth stocks command a premium and are available at high valuations.
Value investing, on the other hand, is about spotting companies which are available at a ‘bargain’. What’s a bargain? Value companies are available at less than their intrinsic worth. An analogy for this is how people shop for vegetables. You check many stalls, locate the freshest veggies, ask the price, and if the price looks high, tell the vendor how much you are ready to pay. Value investing is the real form of investing.
It requires you to find good companies available at a bargain. Why are they at a bargain if they are really ? The stock market chases the fashion of the day. Those stocks that get ‘out of fashion’ are ignored by the market. And that’s exactly why you should pick the best among them. Such stocks are available at a bargain. Later when the market recognises their potential, they get rerated and deliver gains.
Value investing is not just a logical way of investing in businesses, it’s also comparatively ‘safer’. You buy stocks at low valuations and this acts as a safety net if the market itself falls. In market declines, expensively valued growth stocks tend to correct heavily and can give investors sleepless nigh..
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