The Growth Vs Value Debate: A Pint of Miller Lite First!
Understanding the difference between growth vs value is important when choosing a company stock to invest in. You need to have both types of stocks in a balanced portfolio.
About 10,000 years ago (in the mid-1970s), there was a TV advertisement for Miller Lite that swept the country.
It depicted a battle between two groups of former pro athletes. One group was making the case that Miller Lite “tastes great”. Another was contending that it was actually “less filling”. Of course, the real message was that of course Miller Lite was both!
But how does this relate to investing?
Well, you’ll often see Growth or Value used to describe investing styles. You might see the Acme Large Cap Growth Fund, for example. Or, a news article might note that Warren Buffett is known as a famous Value investor.
The traditional view is that growth investing focuses on growth of an aspect of a business, such as revenue or earnings. A growth investor typically believes that growth in this particular area of the business will result in above-average investment performance. Growth organizations tend to be those focused on expansion. Growth companies reinvest their earnings into additional growth, and rarely return cash to investors through dividends.
Value investors take a different approach.
They seek to determine the value of a business based on an analysis of the company’s financial position. This analysis is including its ability to generate excess (or free) cash. In most cases they attempt to determine the free cash flow the business will generate, or the earnings the business is expected to generate. They typically multiply this figure by an industry-appropriate figure to determine business value and ultimately arrive at a value per share. Value investors compare their estimate of value to the price of the stock and seek to buy undervalued stocks.
In this traditional view, growth investing is seen as somewhat more risk intensive as it assumes the growth of today continues into the future. Value investing is seen as providing a margin of safety. The company is being bought for less than its estimated value.
But, you know what? They aren’t mutually exclusive. In my view, they are two sides to the same investment coin. In our view, Growth and Value are a part of every investment.
Every investment has a growth component to it. It can be strongly positive, as in a new tech company establishing a new market. Or, it can be steady or even negative growth for a business facing either short-term woes like the energy industry today, or longer-term obsolescence (think of the old Blockbuster video).
And growth usually, but isn’t always, a good thing for investors.
Investors of course want to see the value of the business they own increase over time. But, for example, if a CEO tries to grow her business in an area where profitability is low, that resulting growth can detract from the value of her company.
Value investing is essentially the attempt to estimate a business’ value by estimating how much extra cash the business will provide to its owners over time (also known as free cash flow). At the heart of it, that is what any business is worth.
So, consider thinking about investing as having both a growth and value side to it. Who knew Miller Lite could help with your investments?