Value and Growth
A Classification that Obscures the Point
My daily job is to convince people that investing is a little like watching grass grow without fiddling with it. It is not easy; it requires conviction, discipline and an unnatural ability to shut your amygdala e fire up your cortex at the same time.
In a world of shamans, pundits and over-educated analysts, any hint of inaction can be misconstrued for laziness, incompetence or fraud. Hence we are constantly faced with sector rotation specialists, style predictors, stock pickers, senior global investment strategists and sundry others who spin wonderful stories and insist you should take advantage of their views. Most of the time their recommendations don’t work out, and when they do you are still left with the perennial doubt: was it skill or luck?
Take, for example, one of the most frequently debated questions of style investing: whether to own value or growth stocks. Reams of analyses and statistics are continuously produced on the subject, and recent outcomes of the rivalry are publicized to the end of the earth by the (temporarily) winning side. It’s a fascinating issue because, among other things, there is no consistently accurate way to predict which of the two groups of stocks will outperform the other in advance. So why bother? Fair question. It’s also fascinating because the words ‘value’ and ‘growth’, as used in this context, are confusing and perhaps completely misleading.
Using standard financial ratios (like price to earnings, price to book value, dividend yield, price to sales), it is customary to classify a common stock in the value category if its price is relatively low in relation to sales, book value, earnings and dividends paid. Alternatively, the stock would be deemed a growth stock if its price is high relative to the same parameters. Simple enough: you have a bunch of statistics according to which you choose one group of stocks or another and then you track their performance over whatever time period pleases you.
But things get fundamentally difficult and the rationale circuitous when you push the reasoning beyond the mere calculations. The problem, I think, lies with the use of the word ‘value’. Two extreme examples may help see my point:
 Wouldn’t the definition for ‘value’ allow a high yield corporate bond to be included in the category or are we getting hung up on the fact that the bond has an indenture, a maturity date (not always: remember perpetuals and PIKs) and covenants (maybe)?
 Isn’t paying 30- or 40-times earnings a ‘value’ proposition if those same earnings will grow at 150% per year for the next 5 years?
In other words, shouldn’t the evolution and uncertainty of the underlying cash flows have something to do with whether an investment is valuable? If yes, what’s the point of talking about ‘value’ versus ‘growth’ and track the performance of the two groups?
Back to watching the grass grow now.
Roberto Plaja, February 7, 2021
Cover: ‘Grass Field’, by Ione Hedges, https://fineartamerica.com/featured/grass-field-ione-hedges.html