The Value Beats Growth Or Vice Versa Myths
One of my greatest pet peeves as a long-time investment professional is the industries’ notion that stocks can be generally categorized into only two styles commonly referred to as growth investing or value investing. These overly-vague notions about investing in stocks can even be seen in our most prestigious financial news outlets and sites. Currently, the mantra appears to be that growth is beating value, as if there is a long-running rivalry between only these two classes of stocks.
Personally, I believe this overly-generalized type of thinking is very detrimental to investors at all levels. My primary beef is that it distracts investors from thinking about important principles of sound investing by focusing their attention on fallacious concepts. Instead of helping investors understand how rates of return on stocks are generated and where they come from, we dupe them into thinking about ambiguous concepts that are imprecisely defined. In truth, there exists a virtual infinite array of common stock types.
And more to the point, most stocks are technically growth stocks at some level. However, some stocks grow slowly while other stocks grow very fast – and literally everything in between. Moreover, even the fastest growth stock can at the same time be in value, or for that matter, be dangerously overvalued. Just because a growth stock comes into value doesn’t change its true classification. In other words, a growth stock can also at the same time be a value stock.
What I’m really suggesting is that we need to be more precise with our conceptions and understandings of how a common stock delivers returns, and where they come from. Stating vague and imprecise concepts such as “value stocks” or “growth stocks” provides little insight or understanding into how money is made in stocks.
I will conclude this introduction by pointing out that value is not an asset class, instead it is a representation of whether (or not) you are paying a fair price for an asset. As previously stated, growth stocks can also simultaneously be available at a fair value or even undervalued. At the end of the day, valuation is a measurement of the level of risk you are assuming in order to achieve a rate of return. Or as Warren Buffett once so aptly put it “Price is what you pay, value is what you get.” Even though it should go without saying, investing in any stock at a better value produces a better rate of return – and vice versa. So, let’s look at where the total returns on stocks are sourced from.