Value vs. Growth Investing

Market trends often favor one investment style over another, and the recent growth outperformance does not resolve the debate. Historical data shows value stocks have outperformed growth stocks since 1926, so let us examine both approaches.

Value Investing

The idea behind value investing is that investors are bargain hunting. Value investing focuses on identifying stocks trading below their intrinsic value. The principle is simple: paying less for future cash flows should yield higher returns. Investors buy undervalued stocks and hold them until prices align with fair market value.

This strategy relies on fundamental analysis—reviewing financial statements, balance sheets, and cash flows. Common valuation metrics include price-to-earnings (P/E), price-to-book (P/B), price-to-cash flow (P/C), and price-to-sales (P/S). For example, book value is calculated by subtracting liabilities from assets and dividing by outstanding shares, then would be compared against other companies in the same industry.

Risks of Value Investing

There is no guarantee an undervalued stock will appreciate or can decline further. While value premiums do not show up every day, they often show up quickly and in large magnitudes. For example, in years when value outperformed growth, the average premium was 15%. Consistent exposure is key to capturing these opportunities when they appear.

Growth Investing

Growth investors seek companies positioned for above-average revenue or earnings growth. They often buy stocks with strong momentum, expecting continued appreciation as the business expands. Growth investors are more concerned about whether a company is exhibiting behavior that suggests it will be one of tomorrow’s leaders; they are less focused on the current value of the underlying company.

Rather than focusing on valuation, growth investors prioritize factors like competitive advantage, revenue acceleration, cost control, and experienced leadership.

When growth investors find a promising stock, they buy it, even if it has already experienced rapid price appreciation, in the hope that its price will continue to rise as the company grows and attracts more investors.

Risks of Growth Investing

Growth stocks typically trade at high P/E ratios, exhibit greater volatility, and rarely pay dividends. They are sensitive to business cycles and perform best during economic expansions but can suffer sharp declines if growth expectations falter.

Conclusion

Where value investors use analysis, growth investors favor criteria. Value investing targets undervalued stocks; growth investing pursues companies expected to outperform. Both rely on price appreciation but for different reasons. A blended approach may offer balanced risk and reward. Consult an advisor before making portfolio decisions.