What is The Traditional Definition of Value and Growth Investing?

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In the traditional sense, value investing could be defined as buying a stock that is worth $1 today for 50 cents.

In the traditional sense, growth investing could be defined as buying something that is worth $1 today for $1.50 but it could be worth $6, five years from now.

Based on the Economic Times, growth investing is about finding companies that are expected to grow faster than the market while value investing is identifying companies whose stock prices are lower than their fundamental worth.

Why In My Definition, Value, and Growth Investing Essentially Has The Same Goal

Yes, growth stocks do not normally give out dividends and value stocks have the perception that they give out dividends more often. But value and growth investing have the same goal: which is to find the biggest opportunity or a gap or mispricing in relation to the business value at that point in time.

Both should simply be called “investing” or “business-focused or business-like investing”. Because both growth and value investing are business-focused investing in which an investor buys because they find that the price is cheap or reasonable in relation to what the true value of the business is.

There are more similarities in both the traditional senses of value investing and growth investing than we think.

Be it growth or value investing, like Warren Buffett said, “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, 10, and 20 years from now.”.

In Value or Growth Investing, Patience + Understanding of The Business is Key

In both value and growth investing, if we want to have big money, patience is one of the key ingredients for it. But again it really depends, a turnaround play can take less than 1 year to play out, on the other hand, asset play can take a few years or compounders – we may never want to sell it ever.

Ultimately, based on the type of company, we have to know which companies are worth paying a fair price or even a premium on.

“I don’t want to spend my time trying to earn a lot of little profits. I want very, very big profits that I’m ready to wait for.” – Philip Fisher

And hence, in both value and growth investing, we need to understand the business well enough to know at what price is good enough for us to buy it. So in the future, we have a reasonable probability of selling them at big profits (because we know their fair and overvalued range in relation to the price we bought them at).

I View The Categorization As We Are Either A Value or Growth Investor Limiting

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If we view ourselves as a growth investor, then in the traditional sense, we will say no to value plays, asset plays, and turnaround plays for non-growth companies. And I find that limiting. Because in investing, we need to be flexible and adaptable as long as the opportunities are within our circle of competency, we should hit the big fat pitch that is right in front of us – no matter if it is growth or value plays.

So I propose us simply being an investor. A focused investor that is open to opportunities that we can understand be it in the traditional value plays or growth plays. Not saying no to the other simply because of our limiting categorization of ourselves either as a value or growth investor.

“Value investing, the way I regarded it, will never go out of style because value investing, the way I conceive it, is always wanting to get more value than you pay for when you buy a stock and that approach will never go out of style. Some people think that value investing is you chase companies that have a lot of cash and they’re in a lousy business or something. But I don’t define that as value investing. I think all good investing is value investing, and it’s just that some people look for values in strong companies and some look for values in weak companies, but every value investor tries to get more value than she pays for.” – Charlie Munger

So did Charlie just described value investing? or growth investing? My point is that it does not matter. All good investing should be the same – buying things for less than what we think will be worth in the future. 

In Conclusion

Opportunities come from many angles.

A traditional value kind of investor should not overlook growth companies. A growth kind of investor should not overlook traditional value plays.

We should simply invest in anything that we understand and find mispricing in. Categorizing ourselves either as a growth or value investor in my view can be limiting.

I prefer to see myself simply as an investor, business-focused investing, or quality-focused investor.

Because in both the traditional kind of value or growth investing, we ultimately need to find quality in the play, and not speculate.

As long as I understand the business and it is run by great management, selling at a reasonable price compared to the business quality, I am open to investing in it – be it in the so-called value or growth companies. Because in my view, there is value in growth and there is also growth in value.

Based on Merrill, growth stocks tend to perform better when interest rates are falling and earnings are rising. But when economies are cooling, they are likely to be the first punished. While value stocks may do well early in an economic recovery but are typically more likely to lag in a sustained bull market.

Combining both value and growth strategies might give us the potential to gain throughout the economic cycles while staying within our circle of competence.

Even Fidelity suggests that we use a mix of growth and value strategies. They say it is akin to choosing between Batman and Superman. And I would agree. Why not do both?

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Disclosure:

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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