Value vs. Growth Investing: The Battle Wages On

The ancient battle between Value and Growth investing continues, with Barron's weighing in with its take on the issue. It's starting to remind me of the Hundred Years' War between France and England or that Star Trek episode where two planets have been at war for five hundred years.

Value Investing has underperformed growth investing over a six month or three year horizon, but Value Investing outperformed in the second quarter of 2009.

The problem with this and all other like statistics is that it artificially categorizes all cheap stock as Value stocks. Barron's uses the Russell indexes to measure performance, and specifically mentions Bear Stearns, Citigroup (C), Freddie Mac (FRE), General Motors, Macy's (M) and JCPenney (JCP) as being particularly harmful to Value investors.

Just because a stock is cheap doesn't make it a Value stock. This is pretty basic and is one of the first things any investor learns after picking up a book written on Value investing.

Comments

[Old Trader:]

"Just because a stock is cheap doesn't make it a Value stock."

An excellent point, and as you point out, one overlooked by many critics of value investing. Having said that, the trick is to be able to discern whether the factors that cause a stock to be "cheap" are transitory in nature, or if their business model is truly "broke"....which can be easier said than done.

Aug 03 04:51 PM

[seasaw:]

Reminds me of Wittgenstein's original thesis that philosophical disputes were meaningless, caused by misuses of language. All investing is value investing, anything else is speculation. Obviously, the amount of future growth (particularly of return on equity) is a fundamental component of a stock's value (some define a stock's value as the present value of its future income stream). Bad value investors overpay for company's with poor future prospects that are not the "value" that they think they are. Bad growth investors overpay for future growth, particularly the wrong type of growth that does not lead to excess cash.

Aug 04 11:41 AM