Value stocks are when the market has undervalued the stock for a variety of reasons, and the investor hopes to get in before the market corrects the price (Little, K., 2019). The reasons that value stocks perform better over the long term are because they are linked to businesses that have been around longer and have strong business models that can endure the ups and downs of an ever-changing market. Growth stocks are associated with start-up companies or companies with more risk associated with them. The potential for larger returns is available with growth stocks, but value stocks or small stocks are the safer routes to take with investments. Also, value stocks perform better during economic growth where growth stocks perform better during downturns in the economy or flatline in economic growth. Currently, Ford is a value stock that has sustained sales growth within the marketplace. Ford’s reasonable pricing, its focus on in-cabin luxuries such as infotainment systems, and its push to improve fuel efficiency with the introduction of the Ecoboost engine, have helped it maintain or grow its market share domestically (Williams, S., 2018).
According to Berk & DeMarzo (2017), familiarity bias is when investors favor investments in companies they are familiar with (pg. 450). Overconfidence bias is when an investor believes that they know more than they truly do. These biases are easy for investors to succumb to because of ego and lack of knowledge in truly understanding the market and how it works. Comfort in a company and feeling as though the product is the best product on the market will create a sense of believing that the stock would be profitable, and investing in the stock would be a smart investment decision. Without understanding the financial background of the company and how the demand within the global marketplace is for the product, familiarity bias will pose a risk for investments. For example, I love the product that Justice for Girls sells, and had I not understood financial decision making before this class, I may have fallen into a familiarity bias with investing in a company based on liking their product. Without analyzing the financial statements and looking at the future growth potential of the company and the demand for the product, investing in the company would be risky.
Reference
Berk, J., and DeMarzo, P. (2017). Corporate Finance: The Core (4th ed.). Boston, MA: Pearson Learning Solutions
Little, K. (2019, April 20). How Growth and Value Stocks Differ. Retrieved from https://www.thebalance.com/growth-value-stocks-defined-3141109
Williams, S. (2018, October 5). Growth Stocks vs. Value Stocks: Over the Long Term, Your Best Bet Is. Retrieved from https://www.fool.com/investing/2016/06/19/growth-stocks-vs-value-stocks-over-the-long-term-y.aspx
