The dispute between „value“ and „growth“ followers is almost as old as the stock market itself, although these are not per se contrary investment styles. The value of a company is created by growth. Value stocks are regarded as boring thick ships with little growth and low valuation, growth stocks as speedboats characterised by high profit growth.
What is value, what is growth, as defined by the relevant index providers? – They make it easy for themselves and usually only look at the ratio of a company’s price to book value (KBV). This indicates how the current market value of a company is quoted in relation to the equity value shown in the balance sheet. In most cases, the index providers „book“ the more expensive half of all shares in the index according to KBV in the „Growth“ index and the other half in the „Value“ index. In our view, this is an inadequate, almost misleading approach.
Since the end of the financial crisis in 2008/09, value stocks have performed significantly worse than growth stocks. However, global economic growth has slowed in the meantime, which has further weakened the value sector. Former drivers such as China and the emerging markets are losing strength. On the corporate side, many global trends have increasingly reached market saturation, so that there is a lack of growth opportunities in existing industries. In many cases, growth companies only keep shareholders happy by buying back shares at the expense of their own balance sheets, but in contrast to many value stocks, they cannot always afford to do so. This is a trend that can still surprise negatively in the event of a rise in interest rates.
As a result of the poor price performance, many value stocks are cheaper than seldom before. At the same time, the valuation of growth equities has again reached extreme levels. This is partly due to the bull market in large US technology stocks. From our point of view, it seems advisable not to look per se at the Value and Growth categories, but at current valuations and future prospects.
An investment in the stock market should always focus on four positive questions: Do I understand the business model? Are the company’s prospects good for the next ten years? Is the management acting in the interests of the shareholder? Is the valuation low enough for an entry? In this way, „value traps“, i.e. structurally weak companies, can be avoided.
It should also be borne in mind that not every style is equally suitable for an investor. To focus on growth strategies is mentally less challenging because investors usually „swim with the flow“. Value investors, on the other hand, are often off the beaten track. The most successful investors in the world combine both approaches by buying undervalued equities with solid long-term growth potential. However, these are very scarce and not easy to find for every investor.
A distinction between value and growth stocks seems redundant. What is the point of investing if not adding value to the portfolio?
All stock market investments are about investing money now to get more later. It’s the same calculation that investors should make, whether you buy a bank share at 30 percent of its book value or a share like Amazon with a price-earnings ratio of 73. Nevertheless, you can’t avoid the question of „value“ or growth shares as market observers.