Dear Reader,

What’s your investing style?

Are you a value investor – grouped in with heavyweights like Warren Buffett and John Templeton?

Or do you prefer a growth investing model – alongside guys like Peter Lynch and William O’Neil?

Supporters of each approach are as vocal about their theories as the bulls and bears are about theirs.

Each side can point to statistics that prove their view is the correct one. Toss in contrarians, believers in GARP (Growth At a Reasonable Price – more on this in a moment) and various other methods of investing and it becomes a dizzying cacophony that leaves an investor wondering which approach is best.

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Four investing styles: Which one is right for you?

Breaking down each of the four approaches…

#1. Value investing: It’s hard to argue with the success of Warren Buffett, John Templeton and Martin Whitman – famous value investors who’ve made fortunes for themselves and for their clients.

Value investors look for companies trading at less than their intrinsic value. They tend to like companies with low price-to-earnings (PEs), price-to-sales and price-to-book ratios. You often find that value stocks boast high dividend yields because their share prices have fallen.

When I first got involved in the markets, I was a value investor. It taught me to be patient, as it tends to take time for the market to realise the full worth of value stocks. However, that patience is usually rewarded, as the gains can be significant once the stocks become fully valued (or overvalued).

As my career evolved, though, I shifted more towards growth stocks…

#2. Growth Investing: Growth investors aren’t as concerned with PE ratios or other valuation metrics as much as they are with a company’s growth prospects.

Growth stocks tend to be smaller and are a bit riskier because, if the projected growth doesn’t materialise, the stock can get punished. Of course, growth stocks can seemingly rise forever if they continue to hit or exceed growth projections.

#3. GARP (Growth At a Reasonable Price): This is a blend of value and growth. GARP investors want growth, but will only pay what they consider a reasonable price.

As a result, perhaps the most important valuation metric is the PE to Growth ratio (PEG).

Price earnings to Growth ratio (PEG)

This is a way of calculating a stock’s value while factoring in its earnings growth.

You do this by dividing the price-to-earnings ratio (PE) by the stock’s annual earnings per share growth rate.

By taking growth into account, the PEG ratio is widely considered a more accurate reflection of a stock’s true value, rather than just the PE ratio.

Using the PEG ratio is easy. A PEG of 1.0 means the market considers the stock to be fair value. A PEG under 1.0 means the stock is undervalued, while a PEG over 1.0 means the stock is overvalued.

Typically, a GARP investor will insist on a PEG of 1.0 or less. That means the PE ratio will be lower than the growth rate.

#4. Contrarian: Investors who use this method need to have nerves of steel. They buy stocks that brokers and mainstream investors shun.

Contrarians need to be extra diligent in their research to find viable reasons to invest in unloved stocks. It could be that the companies in question are worth more than their market caps, due to factors like over-zealous sellers after bad news, or that brokers are just ignoring a company’s potential.

Contrarians have to be able to not only go against the majority of investors, but also have patience to see their investment thesis realised.

David Dreman is one of the most famous contrarian investors, having written the bible of contrarian investing, Contrarian Investment Strategy: The Psychology of Stock Market Success, as well as two follow-ups. They’re must-reads for any investor, but particularly those who consider themselves contrarians.

So which of these four investing approaches is right for you?

The key is to invest with style… Every style…

The answer should be all of them.

Just as you’d never load your portfolio with only technology stocks or only gold stocks, it shouldn’t contain only value or growth stocks.

Remember that various approaches dip into and out of favor, just like various sectors and stocks.

So if picking value stocks is your thing, that’s fine. Just be sure to add a good growth stock mutual fund or ETF to your portfolio to balance it out. That way you’ll have exposure to what ever is working at that moment.

And remember, no matter what investing method you use, you’re going to see periods where your approach outperforms or underperforms the market, or just bounces along at the same pace.

Here’s to your financial freedom,

Marc Lichtenfeld
For Money Morning

PS: Not knowing what type of investor you are can hold you back from maximising your profits. Today, I’m giving you the chance to not only unlock the secrets to your own investing success, but I’ll also the ability to always your decisions on sound reasoning, coupled with powerful strategies that’ll help you beat the market - and the crowd.

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