Growth investing and value investing are the names given to different investing styles. What’s the difference between the two- and which is ‘better’?
Investors will often classify individual stocks as either growth or value to help determine if the stock should be used as part of a growth or value investing strategy. Things are not that black and white and some stocks exhibit qualities of both. Nonetheless, distinguishing between the two categories is still a useful exercise - either to define your investing style or to keep a balanced portfolio.
Before we dig into the characteristics of each style, let’s look at some classic examples of companies that fit into growth or value. These are not recommendations but merely famous companies that should give you a feeling about which kind of company fits into which style.
Growth |
Value |
Tesla (TSLA) |
Coca-Cola (KO) |
Amazon (AMZN) |
Proctor & Gamble (PG) |
Facebook (FB) |
Walmart (WMT) |
Netflix (NFLX) |
Johnson & Johnson (JNJ) |
Alphabet (GOOG) |
Cisco Systems (CSCO) |
Whether an investor will label a stock as a ‘growth stock’ or a ‘value stock’ is a function of past earnings and stock price performance.
Growth investing involves picking stocks that are growing fast in the belief that they will keep growing, ideally even faster. The idea is investors buy the stocks before the company grows its earnings to full potential. How do you find growth stocks?
Value stocks are companies where the price is low and earnings growth has perhaps been slower or even declining. Value investing is with the logic that a good company is being underappreciated by the market and that its fortunes will soon turn around. How do you find value stocks?
In a word, neither. There are periods of time when either growth or value will outperform. Typically growth outperforms in a bull market and value outperforms in a bear market.
The following chart shows rolling three-year total return (including dividends) for the Russell 1000 Growth and Russell 1000 Value over the last 30 years.
It’s true to say that the last decade (since the ’08 financial crisis) has seen a long outperformance of growth investing. There have been only brief periods when value performed better (seen when the oscillator at the bottom falls below zero).
History suggests value is due a longer period of outperformance. However, ultra-low interest rates are generally understood to be the reason that every time value has started to perform better than growth in the last 10 years, it has proven to be a false dawn. Rates probably must move up for value to comeback. What makes that tricky is that higher rates could prove to be a problem for the entire stock market. If there is a bear market, many might choose cash over value stocks.
Whether to choose growth or value investing depends on the current market outlook and your own financial goals and risk tolerance. Both investing strategies offer both opportunity and risk. Which style you choose is ultimately a personal preference.
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