In terms of the style of investing referred to as ‘growth investing’ the so called ‘father’ of this is probably Thomas R Price Jnr (1898 to 1983). Mr Price believed that when you invest for growth you are typically seeking capital appreciation over the long term and you will therefore choose investments that you believe will exhibit a faster than average increase in share price over the coming years. With growth stocks profits, rather than being paid out to shareholders, are generally reinvested in the company to achieve further growth.
Alternatively the ‘father’ of ‘value’ investing is generally considered to be Benjamin Graham (1894 to 1976). Mr Graham developed the idea of buying stocks below their intrinsic value to limit downside risk and promoted the idea that stocks often trade at prices that do not reflect their intrinsic value. Income investors and value investors both want to own the stocks of established, profitable companies; however, income investors acquire stocks that have a history of paying dividends to shareholders. The general expectation therefore is that income paying stocks are more ‘mature’ than growth stocks, which might be considered the up and coming youngsters, and therefore perhaps more risky as a consequence? Income investors, hopefully, receive money just by holding stocks. Income and value investors are both concerned with a stock’s fundamentals.
When thinking about a potential choice between capital growth and income it must be noted that some investors, such as Warren Buffett, have stated that there is no theoretical difference between the concepts of value and growth in consideration of the concept of an asset’s intrinsic value (see the 1992 Berkshire Hathaway Annual Report for Buffett’s discussion of this). In addition, if just investing in one style of stocks, diversification could be negatively impacted.
So should investors consider growth and income separately?
In my opinion successful investors are like successful generals: they have realistic objectives and a clear strategy. First however investors have to consider what their objectives are?
In terms of objectives these can be many and varied but investors might perhaps use as a useful starting point some age-based generalisations/stereotypes?
The reason for this is that an investor’s age often determines the period over which they are aiming to invest. Thus, younger people are usually at the stage where they are trying to accumulate wealth and can work to a timescale of several decades. As a result they can normally afford to invest for capital growth rather than income and to take some risks with their money. Older people on the other hand, often working to a shorter timescale, will usually be more cautious and they may need to rely on the income from their investments to meet various living expenses or special “treats”. (As I say these are simply starting points and generalisations/ stereotypes.)
The fact is however that in my experience few people fit a stereotype exactly. Individuals are just that and people’s lives are all different and unpredictable. Generally individuals planning for the future will not know if they might get divorced, change jobs or be made redundant. I do not believe that anyone can necessarily accurately predict what their circumstances will be in 10 years time? You can plan but in no way can you be certain. So although it is sensible to have a broad financial plan it is also sensible to have one that is flexible enough to accommodate the unexpected and this generally means having diversified assets.
