Tag: Growth investing

Value vs Growth

If you follow the financial media and the media coverage around stock markets on topic that repeatedly pops up is the Value vs Growth debate. Apparently, Value has underperformed Growth for many years now and some have even gone so far as to declare Value Investing dead.

Why Value Investing is indeed Dead

I also think that Value Investing is dead, but not for same reasons that the pundits do. The general conception of the value is dead logic is that:

  1. The market is much more efficient now and the competition within value investors is fiercest. This drives away any pricing opportunities sooner that it used to be.
  2. The internet and globalization has created an environment with more extreme scaling effects and power laws. This results in winner-takes-it-all situations where one or two players dominate the market and take in all the profits.

The conventional value invest retort is that value is relative to price. That is, that a good company is not a good investment at any price. Value investors also tend to believe that the move into passive investing has favored companies that are considered growth companies at the cost of companies that would be considered value stocks.

What is the opposite of Growth Investing?

My logic for declaring Value Investing dead, is that Value Investing never existed in the first place. Value Investing and Growth Investing are both fundamental investing methodologies. Both strategies are looking at fundamental factors (revenues, earnings, cash flows) and estimating the current value from those factors.

But is value the opposite of growth? If Growth Investing is about discovering and investing in companies that are growing fast and that this growth underestimated in the current value of the stock. You could say that growth investors are of the opinion that the market over-discounts the value of future profitability of high quality growth companies.

The opposite of Growth Investing would be to discovering and investing in companies that are deteriorating but that this deterioration is overestimated in the current value of the stock (and/or higher up in the capital structure). The opposite of Growth Investing, in my humble opinion, is Distressed Investing.

Distressed investing is Value Investing. But Growth Investing is also Value Investing, because all Value Investing is just Fundamental Investing.

Value and Growth are Joined at the Hip

Most people think Warren Buffett is a value investor but if you want to go into the particulars, one could argue that he is primarily a fundamental investor. Buffett famously said that growth and value are joined at the hip. Both are areas of fundamental analysis.

One could also argue that many business owners would not easily understand the question if you would ask if they focus more on growth or value in their capital allocations. Business owners simply allocate capital to the projects with the highest expected IRR, irrespective of any category you might want to fit it into. 

Personally, I really like the framework put forth by the late Marty Whitman. In his opinion, there are are 5 main areas of fundamental finance: 

  1. Value Investing (limited to minority positions in public co’s) 
  2. Distress Investing
  3. Control Investing
  4. Credit Analysis
  5. First and Second Stage Venture Capital Investments

Warren Buffett, as an example, has been active in all of those categories, either directly or indirectly. Henry Singleton, as well, is someone you could not classify as a value investor specifically. He just went where he thought the highest IRR was at any given time.