In this article we would like to explain that “Growth Investing” and “Value Investing” are not dissimilar theories or approaches of investing.

It is thus not correct to talk of growth vs value investing but rather to ask how do the two approaches to investing fit together.

All profitable investing, as this article will show, is in fact value investing as growth is just one of the factors to consider when calculating if a share is attractively priced.

Charlie Munger, Warren Buffett’s business partner sums the Value vs Growth investing debate up as follows:

“The whole concept of dividing it up into ‘value’ and ‘growth’ strikes me as twaddle. It’s convenient for a bunch of pension fund consultants to get fees prattling about and a way for one adviser to distinguish himself from another. But to me, all intelligent investing is value investing.”

Warren Buffett spoke of growth vs value investing in a softer tone when he said:

“The two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.”

What is Growth Investing?

Philip Fisher (1907-2004) was one of the greatest investment minds in history.

Working from a modest office on the West Coast in the aftermath of the Great Depression, he developed a buy-and-hold value and growth model for investments.

In addition to teaching at the Stanford School of Business, he authored several books including the excellent book “Common Stocks and Uncommon Profits”.

According to Fisher growth investing is a style of investment where investors invest in companies that exhibit signs of above-average growth in revenue or profits or both. Growth investors invest in these companies even if the share price appears expensive in terms of valuation metrics such as price-to-earning or price-to-book ratios.

What is Value Investing?

Benjamin Graham (1894-1976) was an American economist and professional investor and is considered the father of Value Investing, an investment approach he began taught at Columbia Business School.

Warren Buffett is a former student of Graham’s and credits him with providing him with the investment frame of reference that made him successful.

In 1949 Graham wrote a famous book, “The Intelligent Investor”. It has been revised many times and is still in print.

Value investing involves buying the shares of companies that are attractively priced compared to intrinsic or calculated value.

Examples of such undervaluation may be public companies that trade at discounts to book value or tangible book value, have high dividend yields or have low price-to-earning multiples.

A comparison of Growth vs Value Investing models

Warren Buffet considers Fisher’s book “Common Stocks and Uncommon Profits” on a par with Graham’s “The Intelligent Investor”.

The following table compares Fisher’s 15-point guide to successful investing with the principles of Value Investing, according to Graham and refined by Buffett.

Question to ask about companies according to the respective investment strategies:

As can be seen Growth and Value Investing is one and the same approach to investing. They look at the same factors and ask the same questions.

Growth, in terms of sales, operating profit, pre-tax profit, net income, is just a factor to be considered in the valuation of a security. The higher the growth the more an investor would be willing to pay for the company.

It is thus not question of growth vs value investing but rather how much growth is priced into the current share price and how does that compare with your best estimate of the company's growth?

If your assessment of growth is higher than assumed by the current share price the share should be purchased.

Have you signed up for my free weekly newsletter "Investing that makes sense" yet?

Sign up now and receive articles like this in your inbox weekly.

And if you sign up now you will also receive a 10 page free bonus report - Enhanced Checklist for Value Investors - with over 30 proven checklist items to improve your investment returns.

 

I respect your privacy - Privacy Policy 

Additional Value Investing Articles

Benjamin Graham on Value Investing

Warren Buffett on Value Investing

What is Value Investing

Back to our Resource Page

P.S. A media company in the wrong country at the wrong time...