Warren Buffett famously said that the distinction between value investing and growth investing is not real, because value investors want growth and growth investors do not want to overpay. Critics echo this point, stating that the distinction is false and was created by academics in the early 1960s and has subsequently been taken up by the investment consulting community. Nevertheless, more than 80% of our CFA Institute Financial NewsBrief readers think there is a difference between value investing and growth investing, with the most popular distinction being that value investors focus on fundamentals and growth investors on momentum.
What Is the Primary Difference between Value and Growth Investment Philosophies?
Equal numbers of this group of respondents say there is a difference in preferred time horizons and that value investors focus on mean reversion whereas their growth peers focus on idiosyncratic risk. A smaller minority believe that differences in required rates of return divide the two investment styles. Most surprising is that only one in six respondents agree with Buffett's view that there is not much difference at all.
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16 Comments
I have a feeling that if you took a sample of large cap growth funds and large cap value funds, you would see many of the same names in their top 10 holdings.
Hello Brian,
I think you are probably right...but to what would you attribute that likelihood? Buying the same company at different points in time; the value investor when the stock was depressed three weeks ago, and the growth investor seven years ago when the business model was uncertain? Or is it that many firms get penalized for 'tracking error'? One of the problems with the distinction between growth and value is that academic finance folk and the consulting community tend to evaluate it with book to price ratios, or some other ratio that includes price. As we all know, price fluctuates over time. So the definition of growth and value also fluctuates with time and for the same company.
Cheers!
Jason
I think there is a difference between value investing and growth investing.
For people who just want to invest in order to earn some money in less time is something that can be related to growth investing.
On the other side, people who want to make the business better and earn considerably over long periods of time can be called value investing.
At last it is in the minds of people as to why they want to invest and for how much time they will keep their funds in the investment which differentiates the two concepts.
Hell Rishit,
Thank you for sharing your thoughts about the subject. Growth vs. value, and speculator vs. investor, remain perennially interesting to investors, as the success of this poll question demonstrates.
Cheers!
Jason
Bruce Berkowitz has described value investing as "emotional arbitrage". I'd expand that to say value investing is "emotional and cognitive bias arbitrage." I think there are two types of growth investing: 1/ momentum/greater-fool trading, and 2/ value investing with pathological patience in future cash flows. (Alternatively, it may also be an expression of hubris that makes people overconfident in their ability to estimate what much more uncertain future cash flows will look like.)
A company is available at 5x earnings and is growing earnings @ +30%. Because it's priced cheap it can be called a value stock (you get more value than the price you pay). It's also a growth stock because very few companies are growing earnings @ 30%. Again, it wouldn't be 'value' if its growing @ 5%. You are paying more and getting less value in return. It's not that a value investor is screening only for low PB or low PE stocks. It's only one part of the equation. Neither that a growth investor is looking only for high growth in earnings stocks. The term 'value' is meaningful and completes the proper meaning of long term investing.