The art of finding your own personal investment style

Investors can often exhibit a “style bias”, which means they tend to favour one particular investment approach over others. That bias may be towards companies that are growing their sales, profits, and stock prices at a rapid rate – or, conversely, towards companies whose overall value, represented by their share prices, appears to be pinned by investors at a relatively low level compared to what they’re truly worth. The combined value of all the company’s shares could come in below the actual value of, say, the things the company owns, like property and machinery.

Then there are investors who like to wade in when companies are at a pivotal point in their development – perhaps having just made a major acquisition – or instead focus on the effect specific external factors are likely to have on a firm’s fortunes.

While it’s not always the case, pro portfolio managers often exhibit a marked preference for one type of investment. And seeing as you’re reading this article, you’ll be glad to hear that there’s nothing to stop you from doing the same if you choose. With that in mind, let’s dive in and explore some of the most popular investing styles.

Growth investing

The clue’s in the name: this style is all about “growth”. But what sort of growth, exactly? Essentially, investors adopting this technique seek to single out companies that they think will eventually be able to grow their profits substantially: ultimately, owners of their stock will benefit from those profits in the form of either regular dividends or capital growth as other investors cotton on and pile in.

But since these profits may not actually exist until some potential point in the future, growth investors tend to focus on more immediately discernible evidence of green shoots – especially revenue growth. If a company is increasing its sales at a decent clip then, so the thinking goes, it should eventually figure out how to grow its profit too. Tech giants Amazon and Meta are textbook examples of growth investing gone well, while Zoom and Peloton show how quickly early success can unravel when rapid growth fails to hold up over time.

In the US, over the past decade, growth stocks have consistently outperformed the broader market. Flagship names like NVIDIA and Meta have delivered eye-watering gains, far exceeding the broader market over certain time periods. Given this performance, it’s no surprise that growth investing has become a widely popular strategy. Many of these companies also capture an outsized share of investor attention. They drive some of the most compelling innovations and are often led by high-profile founders and figureheads who remain in the public spotlight.

However, growth investing is often associated with higher volatility, which means it may be more appropriate for investors with a longer investment horizon and a higher tolerance for risk. Historically, growth stocks have tended to perform well during periods of low interest rates and economic expansion. That said, past performance is not a reliable indicator of future returns, and market conditions can change. To get started, some investors use exchange-traded funds (ETFs) like the iShares MSCI World Growth ETF or Vanguard Growth ETF to access diversified growth exposure without needing to pick individual stocks.

Value investing

You might think growth investing is the only show in town. After all, doesn’t all investing involve backing businesses you believe will grow? In many ways, though, value investing takes a different angle. Rather than focusing primarily on what a company might be worth years from now, value investors tend to concentrate on what it appears to be worth today. If their analysis suggests the market is undervaluing a business based on its current fundamentals, they may buy the “cheap” stock and wait for the market to recognise that value. That doesn’t mean value investors ignore the future. Many still take long-term prospects into account. But future growth usually plays a more supporting role compared to growth strategies, where expectations about expansion and earnings potential often carry more weight.

Instead of searching for sales growth, value-oriented investors look at things like the present value of the equipment or real estate that a company owns. They also tend to weigh up how much profit the company is making today, and especially how much actual cash it’s generating: “profit” from an accounting perspective and the money that goes into a company’s bank account at the end of the year can be two very different things. Terms like price-to-book ratio, which means the value of the company relative to the assets it owns, and measurements like dividend yield – how much of its profit the company shares with investors as a percentage of its market value – tend to be very important to value investors. One of the most well-known value investors is Warren Buffett, whose firm Berkshire Hathaway has built substantial positions in companies like Coca-Cola, American Express, and Chevron—businesses with strong fundamentals and consistent cash flows.

“Magic formula” investing is one popular investment process that uses relatively straightforward, value-focused metrics to identify attractive stocks. This and other value strategies are based on the idea that buying companies perceived to be undervalued right now is more practical than trying to predict what a company might be worth in five years. Value stocks could be considered less risky because their prices are typically based on current, observable fundamentals such as earnings, assets, and cash flow. Unlike growth stocks, which rely heavily on future expectations that may or may not materialise, value stocks are often priced below what careful analysis suggests they are worth today. When investors focus on businesses with solid present-day fundamentals, there may be a smaller margin for error. This can help lower the risk of capital loss, provided the investor’s valuation is sound and the company remains financially stable.

Value investing may suit investors with a moderate risk profile, particularly those who prefer investment strategies based more on current fundamentals than future projections. This approach has, at times, shown relative strength during periods of economic recovery or rising interest rates, when investors may favour stability and established cash flows.

There are a number of exchange-traded funds (ETFs) that offer exposure to value-oriented strategies. For example, the Vanguard Value ETF and the iShares MSCI World Value ETF aim to screen for companies considered undervalued across various regions and sectors. As always, investors should consider the specific investment objectives, risks, and costs of any product before making a decision.

Growth versus value

The fact remains that growth investing strategies have outperformed value investing over the past decade. While attempting to explain that phenomenon could – and does – fill entire books, two major reasons for this are the revolutionary technological changes that the world’s undergone in that time – favouring young and innovative companies like Google parent Alphabet – as well as the ready availability of investor money. Between 2010 and 2020, the Russell 1000 Growth Index returned over 17% annually, while the Russell 1000 Value Index lagged at around 10%, underscoring the performance gap.

Tesla is another great example of a winner: it would have been near-impossible for the nascent electric car company to survive a major recession or some other event that put investors off perennially loss-making businesses. In the absence of this, Tesla has instead raised billions of dollars from investors to fund the development of its transformative technology. As the world embraces electric cars, Tesla has ended up well placed to take advantage – and its stock price has accordingly zapped higher.

While standout growth companies like NVIDIA and Tesla dominate headlines, many others never deliver. For every market darling, there are dozens of heavily hyped businesses that burn through investor capital chasing unproven ideas or overly optimistic projections.

Growth strategies often require patience that stretches decades into the future. Even then, the payoff is never guaranteed. Value investing, by contrast, can feel slow or unfashionable. But it tends to be grounded in the here and now. Investors are not betting on what might happen. They are focused on what a company already owns, earns, and pays out. In volatile or rising-rate environments, that focus on fundamentals can offer stability when growth falters.

In practice, most diversified portfolios can benefit from exposure to both growth and value. Each style has its time in the spotlight, and over the long run, the balance between them often shifts with broader economic conditions and investor sentiment.

The X-factor

Growth and value investing are just two examples of factor investing: using a set of fixed rules to find investment ideals. And there are several other popular factors to be aware of. One is momentum investing, where investors “screen for” stocks whose prices have gained the most recently in the hope that this performance will continue.

Then there’s the low volatility factor, where you try to select those stocks whose prices have swung up and down the least recently. Or the factor that allocates money to smaller stocks in the assumption that they could stand to gain more, percentage-wise, than larger ones.

On the face of it, these strategies might sound a bit far-fetched – or at least too simple to succeed – but plenty of smart people spend their whole careers trying to prove (or disprove) that these factors can reliably beat the wider market.

You can screen for factor-fitting stocks yourself using share data available online; but you can also easily find exchange-traded funds (ETFs) that track these factors and many more. You might see them marketed as “smart-beta” ETFs. For example, the iShares Edge MSCI Momentum Factor ETF and Invesco S&P 500 Low Volatility ETF are among the many tools available to gain direct exposure to specific factor themes.

Special situation investing

Outside of these smart-beta factors, there are a few other approaches to discuss. One big one is “special situation” investing – also known as “event-driven” investing, which is perhaps an easier way to think about it: an event happens, and an investor tries to take advantage of it. The favourite type of event varies: perhaps it’s a company missing a loan repayment, or one business buying another. But whatever the occasion, the special situation investor usually takes a view that it fundamentally changes the outlook for a particular company – and looks to profit from this by either backing or moving against the firm.

Developing such sophisticated views – and, crucially, being correct about them – usually requires the specialist skills of an experienced expert like an investment banker (or an accountant, if the company is facing potential bankruptcy). For these reasons, special situation investors tend to look a bit different to your typical stock-picker. Some, indeed, are so confident of their assertions that they seek to create certain situations for companies: the so-called activist investors. But those rarefied abilities also mean their portfolios are less likely to correspond to the value of the overall market, instead offering something very different. The diversification thus offered by a special situation fund can sometimes be very attractive to other investors – and very profitable.

Substance over style

If you’re looking to a fund product to invest according to a particular style, it’s important to differentiate between the “passive” and “active” approaches on offer.

Passive funds tend to simply track an investment index – but do so at a relatively low cost. Just as you can buy funds that track the performance of, say, the US S&P 500, so too can you find passive investment options incorporating a factor-based approach. Instead of following well-known indexes like the S&P 500, these funds track more bespoke groups of stocks – pre-screened to include only companies that fit certain growth or value characteristics.

The only active decision being taken there is setting those parameters in the first place. By contrast, actively managed funds may, in addition to having an overarching style bias, employ stock-picking strategies that are less strictly formulaic – and instead rely more on the judgment of an investment manager. That idiosyncrasy could lead to unusually high returns compared to simply following the crowd – but the manager’s active services will usually command a higher fee.

Conclusion

Conventional wisdom holds that combining different investment styles can diversify a portfolio and manage risk more effectively. While this balanced approach may have trailed pure growth strategies over the past decade, the next chapter could look very different. As economic conditions shift, so too can market leadership. Styles that have been out of favour, like value investing, may come back into focus.

But performance isn’t the only consideration. Investment style is also personal. Some investors are drawn to the fundamentals-first discipline of value investing, often influenced by thinkers like Warren Buffett. Others are energised by innovation and prefer to back emerging technologies and high-growth disruptors.

There’s no one-size-fits-all strategy. Your preferred style often reflects more than just your financial goals or risk appetite. It can mirror your personality, interests, and broader worldview. Understanding those deeper factors can help you commit to an investment path with confidence and stay the course over the long haul.

In this article, you’ve learned:

• Investors often adopt distinctive approaches – and growth investing, which involves seeking out stocks deemed likely to deliver progressively higher future sales and profits, is one of the biggest.

• Value investing attempts to find companies that are undervalued based on what they own and/or how much they earn today – but while proponents claim it’s a lower-risk approach than growth investing, it’s also proved lower-reward recently.

• Special situation investors take a view on how certain events will pan out for companies, while factor investing involves looking at stocks in light of particular characteristics.

• There are passive and active means of implementing your chosen style bias – but whatever you choose, keep an eye on the economy and adjust your approach accordingly.

Disclaimer: This article provides general information only. It has been prepared without taking account of your objectives, financial situation or needs. It is not to be construed as a solicitation or an offer to buy or sell any financial instruments, or as a recommendation and/or investment advice. It does not intend to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any financial instruments. You should consider your objectives, financial situation and needs before acting on the information in this article. CMC Markets believes that the information in this article is correct, and any opinions and conclusions are reasonably held or made on information available at the time of its compilation, but no representation or warranty is made as to the accuracy, reliability or completeness of any statements made in this article. CMC Markets is under no obligation to, and does not, update or keep current the information contained in this article. Neither CMC Markets nor any of its affiliates or subsidiaries accepts liability for loss or damage arising out of the use of all or any part of this article. Any opinions or conclusions set forth in this article are subject to change without notice and may differ or be contrary to the opinions or conclusions expressed by any other members of CMC Markets.