Value vs Growth Investing
Value investing and Growth Investing are often presented as two competing styles of investing. Indeed there are now many Exchange-traded funds available which claim to offer one of the two styles.
Value Investing |
Growth Investing |
|---|---|
Emphasis on buying shares below their intrinsic value |
Emphasis on buying shares in companies with high growth rates |
Typical Characteristics: |
|
Low Price/earnings ratio |
High earnings growth rate |
Low Price/sales ratio |
High sales growth rate |
Low Price-Cashflow |
High return on equity |
Low Price/book ratio |
High profit margin |
High Dividend yield |
No or low Dividend yield |
Performance of Value and Growth styles
For several years at a time, quite often one of the style of investing will perform better than the other. In the late 1990s growth style stocks significantly outperformed value style stocks. However, since 2000 value stocks have outperformed growth. Some people believe the performance of the two styles goes in a cycle, even viewing them as distinct asset classes, with a view to make strategic switches.
Warren Buffett on Value vs. Growth
Billionaire investor Warren Buffett has been highly critical of these styles. He has commented that investment ratios such as Price/earnings ratio are no guide to value. In an excerpt from his 2000 letter to shareholders he wrote the following:
Market commentators and investment managers who glibly refer to growth and value styles as contrasting approaches to investment are displaying their ignorance, not their sophistication.
This is because Buffett believes the most important ratio is price/intrinsic value, and intrinsic value incorporates the growth rate of the business. However, this is a less practical measure than price/earnings since intrinsic value depends on the estimate of future cash flows, and can therefore be highly subjective.
See also
Value investing Growth Investing