Value vs Growth Investing: When it comes to building wealth through investing, a right and calculated approach may help in significant wealth gain for the investors.
Right and early investment strategy may not just help you with a massive maturity corpus but is also likely to secure your financial needs in future with enough disposable income to spend a happy and healthy life. Apart from various investment options available today, one of the most fundamental choices investors face is whether to opt for Value Investing or Growth Investing.
The decision can have a significant impact on your financial future, and understanding the nuances of each approach is vital for making informed investment decisions.
Before we go deeper, we should start with the difference between Value and Growth Investment strategy.
According to Investopedia, Growth stocks are those of companies that are considered to have the potential to outperform the overall market over time because of their future potential whereas Value stocks are classified as companies that are currently trading below what they are really worth and will thus provide a superior return. Explaining on the two investing strategies, Kunal Pawaskar, Principal Officer & Head – Portfolio Management Services quoted billionaire Warren Buffett, saying “that the intrinsic value is the present value of the stream of cash that’s going to be generated by any financial asset between now and doomsday.”
“Value investing in that sense is not about buying stocks on the cheap while neglecting prospects. It is quite the opposite. If seen like this, being a value investor is the right approach. After all, no one wants to overpay in general, Pawaskar added.
Next, there is the quantitative definition of value and growth. This also takes us into the world of factors and styles – quality, growth, value, size, and momentum among others. Here, low value basically means being placed relatively lower on valuation ratios compared to other stocks in an index. There are no earnings to forecast and no discounted cash flow analysis when seeing a stock using this lens (as compared to intrinsic value).
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Pawaskar explained giving an example saying that you have four stocks in an index – A, B, C, and D, with the following price to earnings ratios. Rank them in ascending order on valuation – the cheapest ones get the highest rank.
| Stock | P/E Ratio | Rank Value |
| A | 26 | 3 |
| B | 11 | 1 |
| C | 17 | 2 |
| D | 43 | 4 |
If you were to create a value portfolio, you could take the first two stocks by rank (B and C), as an example, and hold them for a period. You would then rebalance them by repeating this exercise with the P/E ratios at that point in time.
What is best as a style – Value vs Growth?
There is no one-size-fits-all answer to whether value or growth investing is the better strategy. The key is to diversify your portfolio, balancing value and growth investments to suit your financial objectives and risk appetite.
There have been multi-year cycles when the value style has dominated and other times when the growth style has taken the lead. As it happens with stocks and sectors, overvaluation can happen after a steady upward run in prices. Beyond a certain point, the chance of making returns drops. As a pack, stocks in a particular style can also become overextended on valuations.
This is when the prospect of returns reduces for a style. Growth stocks saw high valuations until the turning point that arrived 3 years ago. On the other hand, value stocks were trading at relatively low valuations.
Pawaskar stated that “in the last few years, we have seen a reversion at both ends. Growth style underperformed the value style. In the three years ending September 2023, the S&P 500 Pure Growth Index delivered 6.6 per cent while the S&P 500 Pure Value Index delivered 50 per cent.” From here on, it is likely that there is a greater role for stocks that fit the value style in portfolios. Flexibility to pick from both style buckets – value and growth, will be valuable.
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In the end, one thing will not change irrespective of whichever approach we take – not overpaying generally serves us well.
