Stop viewing Growth and Value in silos

Nov 24, 2022

Market commentators and investment managers who glibly refer to 'growth' and 'value' styles as contrasting approaches to investment are displaying their ignorance. Growth is simply a component -- usually a plus, sometimes a minus -- in the value equation. Berkshire Hathaway’s shareholder letter in 2000

Nothing like setting the tone with a quote from Warren Buffett.

While expectations of future growth affect a stock’s intrinsic value, Value and Growth do not exist on a single, continuous spectrum and are not diametrically opposite to each other.

Myth: Value and Growth are completely different.
Sanjoy Bhattacharyya: 5 stock investing myths

All investing is value investing, the differences are just semantic.

To say that value investing is all about low PE stocks is farthest from the truth. Quantitative metrics such as PE and PB and dividend yield are statistical measures to test hypothesis; they do not define what is value.

Growth is the largest component of value.

Value is when you put in Re 1 in the hope that after adjusting for inflation, at a future point in time, that unit is worth much more. The aim is to own a business at a price less than what you think it is worth going into the future.

How do you do that? Buy businesses that over time will have an advantage over their competitors, and shall sustain and increase that advantage. Buy businesses that will earn a reasonable growing rate of return on the capital they deploy in their business. Most important is the quality of the business, and if your interests are aligned with the people who manage it. Once you are sanguine about the prospects of the company, then you look at what you are paying for it.

Don't think in terms of cliches.
Bharat Shah: 5 stock investing insights

Growth and Value is the classical ongoing debate that I've never subscribed to, neither do I believe in.

It is an artificial divide and efficient investing should combine both elements. To pick one to the exclusion of the other is foolhardy. Without any meaningful long-term compounding growth, it is hard to generate adequate value. If it is growth at any price (GAAP), then it is unlikely to be intelligent investing. Even that package of growth and longevity has to be found at a price which tilts the economics in your favour; there must be adequate margin of safety.

Equity investing is not even about big fish in a small pond or small fish in a big pond. It is about finding a big pond rather than trying to overly debate the size of the fish.

If the fish is capable and the pond is large, the fish will grow to be fat and big and productive and healthy. If the pond is small, the big fish will get stifled and eventually strangulate itself. Therefore, the size of the pond is crucial to enable fish to grow. The size of the pond will provide the opportunity to grow and get bigger.

Think about it conceptually. When you buy equity, essentially what are you doing? You are postponing gratification. You're making the sacrifice today in the hope of getting a larger outcome tomorrow. You've paid X price, and you're hoping to get X+Y either tomorrow or the day after or whenever. That difference between what you have paid out and what you hope to get additional is the return. And that extra will come only if what you have invested into will get bigger over a period of time.

That act of getting bigger will essentially come from growth, and that growth essentially will come from the size of the pond - the size of the opportunity, along with the capability of the fish.

Quality and Growth are very important sources of Value.
Vitaliy N. Katsenelson: 3 dimensions of value investing

Growth is a tricky dimension. On a stand-alone basis it means very little and can often be dangerous. A company that grew earnings at a fast pace in the past but lacked a sustainable competitive advantage (a bedrock of quality) will invite competition that will destroy current and future profitability.

When you combine growth with quality, however, the mixture is magical and will result in a lot of value. This value lies in future earnings. Another way to say the same thing is: A high-quality company with a high return on capital married to a significant growth runway — the ability to reinvest at a high rate in the future — will create significant value, which will not be observable in last year’s or even next year’s earning power but years from now.

Think about some of Buffett’s best investments: American Express and Geico. Both had significant competitive advantages. In the case of Geico, it sold directly to consumers and thus was a low-cost producer in a commodity industry. American Express simply had an unassailable brand. Both had a huge growth runway ahead when Buffett purchased them.

Price can lie.
Hugh Selby-Smith: Stock Price does not equal Value

Benjamin Graham defined cheap stocks them as the ones that trade at single-digit price-earnings multiples, trade at a discount to book value, or trade below their cash value (net-nets). Graham placed great emphasis on statistical cheapness — his flavour of value investing is tangible — what Warren Buffett calls the cigar-butt approach to investing.

But if the only thing you get out of Graham’s teachings is to buy statistically cheap stocks, then you are shortchanging yourself. This analysis is one-dimensional and ignores much that is important.

Price can lie. A cheap stock could be a very expensive mistake. Price has no scientific or mathematical definition. It is no more than when buyer meets seller, demand meets supply, and opinion meets money. People drive prices, and people are not rational. Valuation may be art not science, but it approximates the truth. It helps an investor understand how much a price is lying, both for good as well as ill. After all, prices can be too low as well as too high.

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