COMMENT
Value vs. Growth

By David Kuo (TMFDragon)
December 6, 2004

Recently, Bloomberg published an article that claimed that in the US, value investing is about to outstrip growth investing for the fifth consecutive year. According to the report, the typical value fund has returned 11% this year, whereas the typical growth fund has gained just 3%.

It is easy to infer from this, that there may be some fail-safe method of picking shares, which if followed religiously, would guarantee success. Sadly, there are no guaranteed systems for picking shares, just different approaches that aim to achieve a rate of return that is better than the market average.

Value investors, for example, look for companies that look attractive based upon measures such as dividend yield, book value, cash flow and earnings. In other words, value investors are looking for shares that appear cheap compared to the market. The aim of value investors, therefore, is to profit when value shares rise after the market corrects its error.

Growth investors, on the other hand, are happy to buy shares that are typically more expensive than the market average. This makes growth investing more risky though because you are paying more for every pound of profit the company makes (and in some cases growth companies may not be making profits at all). Nevertheless, growth investors believe that over the long term, the shares should rise.

Pigeonholing investing styles as either value or growth may be convenient for marketing purposes. Investment funds, for instance, are particularly fond of these labels. However, it can be dangerous to describe yourself as being from either one investing camp or another.

For example, if value shares are in constant demand, then there is a danger that their prices will rise until they no longer represent good value. This could easily be at the expense of growth shares, which would then represent good value, despite being obvious growth companies. This is what Warren Buffett meant when he said, "Growth and value investing are joined at the hip."

In conclusion, growth and value investing both have their merits. However, it is wrong to assume that there is just one, correct way to pick shares. In my view, a balanced share portfolio should include both value and growth companies, or as Buffett would probably say, just good shares.