What are Investors?

There are two types of investors. And the most successful all have something in common.

Would it be fair to say that the most skillful investors have taken to heart a famous line from J.R.R. Tolkien’s The Hobbit? True, tales of dragons and wizards have little to do with the stock market. There is, however, a quote from the book that exemplifies the investing approach of some of the world’s greatest investors.

“The world is indeed full of peril and in it there are many dark places. But still there is much that is fair.” 

More to the point, investors may face volatility, downturns, recessions, depressions, and bear markets. Smart investors take this all in stride. They plan carefully, and they seek out the bargains and the promising stocks that push their portfolios ever upward. In short, no matter what approach an investor takes, the most successful of them seek out the “much that is fair.”

As for the two types?

Value investors identify companies whose stocks are selling at low valuations, and hold them until they are substantially higher. Value investors believe that buying a stock is comparable to buying a portion of the business. Thus, a value investor is not concerned about short-term changes in the stock price as much as the long-term business performance such as earnings growth, competitive positioning, etc.

Growth investors like to put their money into stocks that are going up. Growth investing involves investing in fast-growing companies that are typically less established than blue-chip companies such as Qualcomm (QCOM), Google (GOOGL) and Exxon (XOM). Those global behemoths were once growth stocks themselves, but their period of rapid growth is behind them. The best growth stocks are smaller companies whose best is ahead of them.

The point isn’t that any of these built-in preferences for different kinds of stocks is wrong. Low-priced stocks are more volatile than higher-priced stocks, and they can make very satisfying gains very quickly. (Of course they can go down just as quickly, but let’s leave that out for now.) Similarly, value stocks, while they may take a long time to get back to fair value, do have lower downside risk.

The reality of the market is that every investment portfolio ought to have some of both value and growth in it. Value is a great foundation for a diversified portfolio. But if you stick strictly to value, you’re leaving lots of growth gains on the table.

And to be fair, there is a spectrum of investing styles between these two. Few investors fall 100% into these divisions. Just as a hobbit has “some courage and some wisdom, blended in measure,” so do the most successful investors create a blended portfolio that combines the best qualities of a range of stocks.

To learn more about the different approaches to investing, and find out how to create the right portfolio for you, download your FREE copy of our report, How to Invest in Stocks: How Stocks Work, How to Calculate Return on Investment and Other Investing Basics.