Value Or Growth, What’s Best?
The Investment Perspective – May 2022
Peter Flannery Financial Adviser CFP
“Neither the investing method nor the fundamentals of the business are right or wrong because the mood of the market is favourable or unfavourable toward the “stock”. That is because when you really think about it, “stocks” (shares) are all about the financials and the trading price, the share price… the cash up value. What matters more is the economics of the business”
Peter Flannery
Key Points:
- Clue – the last 10 years, growth stocks outperformed.
- The business or the stock?
- Avoid tricky / complicated investing ways.
The debate as to whether growth stocks or value stocks are better has been ongoing for decades and continues.
Looking at the diagram above, you can see the bar graph showing 10 year blocks (bottom right).
We know that the 1930s and the 2010s (2010 through 2020) were two 10-year blocks in which growth stocks outperformed value stocks. From the 1940s through the 2000s (up until 2010), value stocks outperformed growth stocks.
Just so you know, at WISEplanning, we are agnostic about one or the other.
That may sound a little surprising, given that our methodology is based on value investing. That is, of course, until we look closely at the methodology at WISEplanning, which is known as eco-Investing (investing in the economics of the asset, be it your own closely-held business, direct shares/stocks, or residential property).
e-Biz Investing is about investing specifically in listed businesses (commonly referred to as shares and stocks).
So what’s the difference then?
The bottom line is that at WISEplanning, we invest in the economics of the business and therefore invest in the business rather than the stock.
Simply, the stock could be considered to be the numbers / analyses based around the financials that come out of the balance sheet, the income statement and quarterly or annual reports ( e.g. Revenue (turnover), earnings (profit), p/e ratio, dividend yield).
e-Biz Investing also looks at some of this information, but in addition, we take into account the economics of the business (e.g. the competitive advantage of the business, brand strength, ecosystem).
So, as I analyse different businesses and make recommendations to you, it is as per our eco-Investing framework at WISEplanning (derived from value investing, specifically as per Warren Buffet, Benjamin Graham, and Charlie Munger).
Narrowing it down, it’s based on the e-Biz Investing methodology, which looks at some of those general fund manager/sharebroker-type analyses along with the economics of the business. Therefore, we are investing in the business rather than the stock.
That’s largely why as the investment analyst and the financial adviser, I am not tied to one particular style or another. I am focused on a particular business and the quality of that particular business, along with the pricing of it.
The information about value versus growth is interesting but does not persuade me one way or another because we invest in the business, not the stock. That is why, also in effect, we sort of cover both.
As an aside, as a client of WISEplanning, you’ll know that our portfolios are custom-designed based around a specific investing strategy that fits with your investment risk profile. In short, we are focused on the quality of the business and its future prospects rather than whether it is value or growth.
We invest in the future, not the past.
The financial analysis that you see everywhere comes out of the balance sheet and the income statement. That data is useful but is historical. It is reporting what happened. We need to know about it. What gets interesting is how that data is presented and used.
Whether it be a graph in the annual report that is skewed a certain way to exaggerate how good a result might look, to simply the market reacting to the latest quarterly profit announcement, it pays to be very clear about:
- How data is interpreted and what it leads us to believe. g. A graph with a short x axis (the horizontal axis) and a very tall y axis can disguise a minimal increase in profit, making it look better than reality.
- What is being interpreted. The wrong data, no matter how interesting can lead us down an uncertain path. E.g. Investing in a stock because the line graph on google shows the trading price moving strongly ‘up and to the right’ so to speak. The trading price tells us little about the quality and future prospects of a business.
The significant majority of information that you’ll read, see, and hear across the markets relates to stocks, styles, and pricing as distinct from investing in a business, remaining disciplined around that method and understanding the importance of what makes for a quality business.
The economics of the business, along with how well each business uses capital, provide some good clues.
The stock price offers very limited information about the quality of the underlying business. It does tell you though, whether the market loves or hates a particular business or indeed is totally ambivalent about it.
Anyway complex analysis and much of the data that we see everywhere, everyday is of only limited value to you and I as investors.
“A man does not deserve huge amounts of pay for creating tiny spreads on huge amounts of money. Any idiot can do it. And, as a matter of fact, many idiots do do it.”
Charlie Munger