There are two fundamental approaches to investing: growth investing and value investing. In the former case, an investor seeks companies that are increasing their profits and cash flow, while in the latter, the goal is to find stocks that the market undervalues.
Growth investors tend to focus on young companies that demonstrate rapid revenue growth. They prefer capital appreciation or consistent growth in the market value of their investments over guaranteed dividend payouts.
The key to successful growth investing lies in understanding the life cycle of companies. At the beginning of their journey, new companies can grow very quickly, generating rapid profit increases. At this stage, companies typically reinvest profits back into the business to fuel further growth rather than paying dividends.
As companies mature, profit growth tends to slow down, leading these companies to be more inclined to return profits to investors in the form of dividends, especially as investment opportunities in their markets become limited.
It is commonly believed that, over the long term, value investments outperform growth investments, although recent data challenges this assertion. For example, tech companies have recently demonstrated phenomenal growth; however, history shows that nothing lasts forever.
