Growth vs. Value Investing: Know the Differences

Should you buy on a dip? Or go by adage “Don’t Try to Catch a Falling Knife”?

A popular saying in the stock market is “Don’t try to catch a falling knife.” This means avoiding the purchase of stocks that are rapidly declining, as they may continue to fall, potentially leading to significant financial losses. For example, I once bought a stock and didn’t sell it as it was dropping. Eventually, it became worthless, and the commission to sell it cost more than its value. I had to ask my broker to remove it from my portfolio to avoid the constant reminder of my loss.

In 1999, many dot-com companies never recovered. During the stock market crash, continuing to buy declining investments could lead to significant losses. The NASDAQ ETF QQQ, priced at $120 in early 2000, plummeted to around $20 in 2002. This ETF didn’t return to its $120 price until 2016. Holding this ETF from 1999 and buying more as it fell could have resulted in 0% returns over 17 years. Could that money have earned better returns elsewhere?

In 1999 and 2008, some of my stock investments became worthless. I learned never to hold onto falling stocks or those fluctuating without consistent gains. Instead, I now invest in rising stocks, selling quickly if they don’t perform. Why invest in a falling security when you can wait for the market to rise again (growth investing)?

Interestingly, Warren Buffett and other millionaires take a different approach. Buffett sees falling stocks as bargains, buying when prices are low and others are selling. He focuses on purchasing undervalued stocks (value investing). As Buffett famously said, “Price is what you pay. Value is what you get.”

Understanding why some investors sell while others buy is crucial for successful trading.