Getting Started in Stocks: Growth or Value Investor?

How is the best way to get started investing in individual stocks?

Maybe you already own some individual stocks, but don’t have any organized way to approach buying more or perhaps you’re just getting started.

If you are ready to start investing in individual stocks in an organized and thoughtful manner, you’ll want to develop your own system and strategy.

Growth or Value Stocks?

This article is about your first step, which is deciding if you want to be a “value” or “growth” investor.

There’s no rule that says you can’t be both, although it may be easier to pick one as your primary focus and most investors usually end up more in one camp than the other does.

One strategy is not necessarily better than the other is, although over time value investors have an edge. It is important to note that growth and value investing are not opposites, just different approaches to the same problem.

Overview

Here is an overview of each so you can begin deciding which strategy makes the most sense to you.

The basic characteristics of growth investing:

• Companies exhibit higher than average growth rates in revenues and earnings
• Companies are in expanding industries that are riding an economic and/or demographic cycle
• Companies don’t pay dividends
• High growth companies often beat earnings estimates
• Holding period determined by continued growth of company

The basic characteristics of value investing:

• Companies have higher than average earnings per share
• Companies that pay high dividends
• Companies in solid, but not necessarily glamorous industry
• Companies are industry leaders
• Holding period typically longer than growth stocks

These are not exhaustive lists, but they’ll get you started.

For those who are concerned about risk, and everyone should be, of the two strategies value investing is less risky than growth investing.

Not Risk Free

That doesn’t mean value investing is risk free, but value stocks tend to be less volatile than growth stocks.

If you lean towards growth investing, you will want to pay attention to current stock and economic news – not to chase hot stocks, but to see where growth in occurring in the market.

If you are a value investor, you’ll be paying more attention to the financials using a stock screen to help you find candidates.

Either value or growth is a good place to start, but don’t dismiss the other, there are good opportunities in both strategies.

Suggested Reading

Money Market Funds - Risks and Benefits

Money market funds are a popular cash management tool. Before you use money market funds, make sure you know what they are, how they work, and what risks you might be taking.

What are Money Market Funds

Money market funds are mutual funds that invest in the “money markets”. If you imagine that people buy and sell stocks in the stock market, then you can see how people buy and sell money in the money markets. What does it mean to buy or sell money? It means that you borrow or loan money, respectively.

Similar to your deposit accounts at the bank, money market funds take your money and invest it. Then, they pay a portion of their earnings to you in the form of dividends. Money market funds usually pay a monthly dividend, but there are some alternatives out there.

What do Money Market Funds Invest In?

These funds invest in short term instruments that mature in less than 13 months – at a maximum. By keeping a short time-frame, these funds attempt to reduce risk. In fact, the SEC says that the average maturity of all the investments in a money market fund must be less than 90 days. The longer you loan money to somebody, the greater the chance that something will happen and they won’t be able to pay you back.

Typical investments inside a money market fund might be US Treasury issues, short-term corporate paper, and CD’s.

What Risks am I Taking in Money Market Funds?

There are at least three risks that we should highlight.

First, a money market fund is technically a security. The fund managers attempt to keep the share price constant at $1/share. However, there is no guarantee that the share price will stay at $1/share. If the share price goes down, you can lose some or all of your principal. The US Securities and Exchange Commission notes that “While investor losses in money market funds have been rare, they are possible”. In return for this risk, you should earn a greater return on your cash than you’d expect from an FDIC insured savings account (money market funds are not FDIC insured).

Next, money market fund rates are variable. In other words, you don’t know how much you’ll earn on your investment next month. The rate could go up or down. If it goes up, that may be a good thing. However, if it goes down and you earn less than you expected, you can end up needing more cash.

A final risk you’re taking with money market funds has to do with inflation. Because money market funds are considered to be safer than other investments like stocks, long term average returns on money market funds tends to be less than long term average returns on riskier investments. Over long periods of time, inflation can eat away at your returns.

Why Would I Use Money Market Funds?

Investors who want a decent return from a relatively safe investment use money market funds. The investments are typically liquid, meaning you can usually get your money out within a few business days. You can also take advantage of rising interest rates by keeping your money in an investment that will adjust to the markets.

A lot of institutions allow you to write checks that draw from a money market fund. Therefore, you get the advantages of dividend earnings as well as easy access to your cash. Make sure you ask what restrictions or fees your institution has.

Where Can I Get a Money Market Fund?

When it comes to money market funds, you have choices. They are easy to find at brokerage houses and mutual fund companies – your free cash is sometimes swept into a money market fund automatically. More recently, banks are offering money market funds to their customers.

How To Invest Successfully in Uncertain Times

Throughout any father's life, the cyclical nature of the financial markets can take its toll on income and savings. Whether you are saving for retirement, putting away money for college or other major expenses in your child's life, or whether your income is predicated, in total or in part, on investment income, you always want to make sound decisions.

In a down market like we sometimes experience, it is particularly important to make smart financial decisions. Here are some tips for making it safely through hard economic times.

Difficulty: Average

Time Required: Several hours to start and then an hour here and there

Here's How:

1. Don't Panic. The most common mistake investors make in down markets is to react impulsively. For fathers that can afford to wait out a down cycle, investment advisors recommend that you do so. Selling at the bottom of the market cycle to get cash out to put in other places usually results in a decreased return on investment over time. Riding through the bottom of the wave is usually smart.
2. Review Your Allocation Strategy. At least annually, you should be looking not only at the status of your current investments, but also at the way you allocate new money going into a college savings fund or a retirement account. Generally, the more time you have until you need the funds, the more risk you can afford to take. If the feelings of risk you are experiencing are a little too tenuous for you, consider putting your new contributions to these accounts in a less risky fund.
3. Consider Buying in a Down Market. Experience has shown that markets rebound and grow over time. The key question is your time horizon. Buying stocks near the bottom of the market can be a good strategy if you have time to ride through the rebound.
4. Think About More Conservative Funds. Mutual funds that are mainly composed of stocks are possibly a little risky in a fluctuating market; they are more volatile so there is a good chance for reward but also a good chance for loss. Asset allocation funds that are better balanced between stocks and bonds tend to have more stability in an up and down market. Some investment managers offer what is called a "Life Cycle Fund" which becomes less risky as you age and get closer to retirement.
5. Pay Down Debt. If you have consumer debt, you may be paying interest rates at a much higher level than the rate at which you could invest. Paying off consumer loans and credit card balances is a really wise investment in a time when returns on other investment instruments may be uncertain.
6. Go For the Tried and True. Many investors in an economic downturn will look for opportunities to invest in more speculative ventures, hoping to make up for earlier losses. Investment gurus suggest that in challenging times, wise investors should stay with tried and true companies that have shown a long experience at weathering economic storms. Avoid the temptation to make up any losses in one investment decision.

Tips:

1. Patience is a virtue in times when the economy is struggling. Avoiding hasty decisions and riding through a downturn usually offers the best return over the long term.

Don't be Misled by this Stock Cliche

Over time, the market has averaged about a 10% return annually.

How many times have you heard this statement or one like it to justify investing in the stock market? The statement is sometimes used to suggest that investing in the stock market will earn you a 10% return if you leave your money in long enough.

The problem with statements like this is that they are half-truths, often used out of context with beginning investors who don’t understand the complete truths.

Problem One

The first problem is the statement suggests that you should expect a 10% annual return from your investments in the stock market. Really? Which investments?

People unfamiliar with investing may assume that buying a few (or one) stocks will set them up for this famous 10% return. I know this is true, because they e-mail me all the time when it doesn’t happen.

What Market?

The second problem is what do they mean by “the market?” It wasn’t the S&P 500 in 2004, because it didn’t return 10%. You can buy mutual funds that track large portions of the market like the Russell 3000 or the Russell 5000, but they didn’t perform any better.

The fact is that by investing in individual stocks you are not buying “the market,” so what the market does is of little concern to you.

Your focus is on the portfolio you create and how it will perform in the future, because that’s all that matters. If you want to keep score by comparing your gains to those of some benchmark like the S&P 500, feel free to do so.

However, keep in mind investing is not about beating a benchmark. It is about securing your financial future. If the S&P 500 is up 2% and your portfolio is up 3%, that will be little comfort when you need real dollars to spend in your retirement.

Conclusion

Long-term investors should focus on buying quality stocks that will meet your financial goals and let someone else worry about where their 10% went.

Finding Good Stocks to Buy Compare Stocks to Peers, Industry Sector to Measure Performance

It is never easy picking good stocks, however during very difficult economic times it becomes more important than ever.

When the economy is weak and the market even more unpredictable, good companies falter along with the bad.

A troubled economy tends to strip away any growth weak companies enjoyed in previous growth cycles.

However, because good companies may suffer also, investors need a way to judge a company’s performance.

One way investors can take the pulse of a potential investment is to compare how the company is performing relative to its peers.

Yahoo! Finance offers a way you can compare how a company is doing relative to its industry sector and its peers.

Click on the “Investing” tab and choose “Stocks.” On this page, look for the link to “Sector/Industry Analysis.”

This link takes you to a page that compares the various industry sectors. Other online providers may have a different way of identifying sectors.

Here’s how you can use this information.

Let’s say you are interested in IBM. Click on the “Technology” tab. IBM is in the Diversified Computer Systems sub-group.

If you don’t know where a company is classified, look up its quote and go to the Profile page. How Yahoo! classifies a company is listed in its profile.

Click on the Diversified Computer Systems and you will find a list of the companies in that sub-group. Each company will have a number of financial ratios listed.

At the top of the list are the corresponding numbers for the whole Technology sector as well as numbers for the Diversified Computer Systems group.

You can compare IBM or any other company with the sector and sub-group as well as comparing the company with its peers – such as comparing IBM and Hewlett-Packard.

If you want, you can download this information to a spreadsheet such as Microsoft’s Excel.

This is not a recommendation for IBM or Hewlett-Packard and other online providers of financial information offer similar capabilities as Yahoo!.

Always check current news about a potential investment for any late-breaking announcements and so on that may impact your decision.

Investors have a tremendous amount of information at their fingertips. There is no excuse for making investment decisions in the dark.