Growth investors should consider a combination of growth investments and value stocks for profitable portfolios

Investors who want to build profitable portfolios should consider growth stocks vs. value stocks—and then buy some of both.

Growth investors focus on trying to identify and buy rising stocks when they have further growth ahead. Although these stocks can be volatile, and some investors may see them as vehicles only for short-term wins and losses, they often make good long-term investments, too.

Growth stocks for growth investors

By definition, growth stocks are companies that have above-average growth prospects. They are firms whose earnings growth has been above the market average, and is likely to remain above average. It is also often the case that they pay small dividends or none at all. Instead, they re-invest their cash flow in the business, to promote their growth.

They may be well-known stars or quiet gems, but they do share one common attribute—they have grown at higher-than-average rates within their industries, or within the market as a whole, for years or even decades.

Value stocks for growth investors

Value stocks are typically stocks trading lower than their financial fundamentals suggest. They are perceived as undervalued, and have the potential to rise when more investors discover them.

One of the sweetest and most profitable pleasures of successful investing is to buy high-quality “value stocks” (or stocks that are reasonably priced, if not cheap, in relation to its sales, earnings or assets), then hold on to them as investors recognize the value and push up the share price.

Combining growth and value stocks is a sound strategy for growth investors’ portfolios

Most successful investors own some growth stocks and some value stocks at any given time, depending on where they see the best opportunities. The two can make a good combination. Growth stocks can be top performers when a company is in fact growing. However, a single quarter of bad earnings can send a growth stock into a deep but often temporary slide. Value stocks can test your patience by moving sluggishly for months if not years. But they can make up for it by suddenly shooting up when you least expect.

By combining growth and value in a portfolio, you can achieve good results while holding down risk.

Bonus tips for growth investors:

Don’t get caught up in momentum investing: Momentum investors like to invest in companies whose earnings and stock prices are rising. They are largely unconcerned with value considerations such as high p/e ratios or low dividend yields. They don’t care if a stock trades at 50 or even 100 times earnings. They assume that the company’s earnings and sales will continue to rise steadily as they have in the past, say, five years, and that the stock price will do the same.

Momentum investors are keen on the so-called “positive earnings surprise,” when a company outdoes brokers’ earnings estimates. They view a “negative earnings surprise” —lower-than-expected earnings—as a sell signal. They use a variety of formulas to make buy and sell decisions, but all come down to “buy on strength and sell on weakness.” So they tend to pile into the same stocks all at once, and the gains that follow are something of a self-fulfilling prophecy.

Hidden assets can make a world of difference long-term: Hidden assets can make a huge difference in growth stocks in the long term. The best time to find hidden assets is when they’re still hidden, long before the company begins taking steps to profit from them. Understanding and seeking out hidden assets while you’re evaluating a stock can add enormously to your profits in the course of an investing career. But you need the patience to profit from them because they can stay hidden for a long time after you buy.

Hidden assets can also cut your risk. Stocks with hidden assets are likely to hold up better than those whose assets are easier to spot since they are the last stocks that experienced, successful investors sell. When times are good, on the other hand, stocks with hidden assets tend to do better than average. Good times give them opportunities to put their hidden assets to work.

High debt hurts growth

When you’re researching growth stocks, you need to know how much debt they’re holding. Growth companies with a lot of debt have a hard time recovering from an economic downturn.

The more manageable the debt, the better. When bad times hit, debt-heavy companies often go broke first. Especially ones that also keep trying to allocate part of their cash flow to paying dividends.

Any growth investors out there? Were our tips helpful to you? Share your thoughts with us in the comments.