- Glenn D. Surowiec
Which is better: value or growth investing?
This is a trick question. Neither is better; the two concepts are fully compatible. Before we get into why, let’s start by defining what we mean by these terms. I’ll use the explanation laid out by Investopedia:
“Growth stocks are those companies that are considered to have the potential to outperform the overall market over time because of their future potential. Value stocks are classified as companies that are currently trading below what they are really worth and will thus provide a superior return.”
In other words, growth is the ability of a company to expand over time, while value is more focused on what you are paying for the company relative to its worth.
Growth and value aren’t unrelated or mutually exclusive concepts, though you might not realize it by listening to some investors. One fund manager told Bloomberg, “Before you can easily say tech is growth and energy is value, but now the line between the two is kind of murky and it’s not clear cut as before. Value investors ignoring growth is a mistake.”
I would suggest that this argument is creating a false dichotomy, an unnecessary “either/or,” because investors don’t necessarily pick one to the exclusion of the other.
For myself, I look at growth as an input into the value equation. As a value investor, I want a company that trades below its intrinsic value, like Investopedia says. However, its growth rate necessarily affects its value, so growth is not something I ignore either.
The perception that they are separate considerations probably dates to the “godfather” of value investing (and Warren Buffett’s own mentor), Benjamin Graham. Graham focused heavily on balance sheet net-nets and similar factors that didn’t include a growth component. That was in a pre-Internet world. Today, companies have morphed, opportunities have changed, and much more information about any given business is much more widely available. The idea of value investing as split apart from growth is old-fashioned and outdated.
Consider Graham’s protégé Warren Buffett, who is probably the most famous living value investor today. He absolutely looks for growth!
Ultimately, everyone has their own approach to investing. There’s a lot of capital out there that likes to buy assets that have gone up in the hope that they will continue to do so. So, if you’re a momentum investor, it makes sense to invest in areas that have had a run up. Recently, that has meant commodities and energy more than the tech companies whose stocks have come down in price over the past year.
But it’s entirely possible to say, “I like growth, and I want to own growth companies. However, I'm not willing to pay any price.”
That position blends growth and value into a single philosophy and, if anything, means tech is more attractive than ever right now. For example, I originally bought into Google/Alphabet, Inc. (NASDAQ: GOOG) years ago and have seen significant returns since. As its price fell in 2022 (though not as low as my original purchase price), I added more to my portfolio, largely because Google is a growth stock, and it’s also at an excellent price point. Both dimensions are true, and both are important.