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Growth vs value investing

Two philosophies, two playbooks, two return profiles.

TL;DR

Growth investing buys companies expected to grow earnings rapidly, often at expensive valuations. Value investing buys companies trading below their intrinsic worth, often with slower growth. Different philosophies, different cycles.

Growth profile

Growth stocks have high P/E (often 30–80), revenue growth >15% per year, and reinvest profits rather than pay dividends. Examples: NVDA, TSLA, most software.

Value profile

Value stocks have low P/E (often under 15), pay dividends, generate steady cash flow, and operate in mature industries. Examples: banks (JPM), oil majors (XOM), consumer staples (KO).

The cycle

Growth and value trade leadership in cycles tied to rates and growth conditions.

  • →2010s — growth dominated as rates stayed near zero
  • →2022 — value crushed growth as the Fed hiked aggressively
  • →Long-run — research shows value has slightly outperformed, with high variance
Worked example

Growth vs value at the same price

Both Stock A and Stock B trade at $100 today.

  1. 1Stock A (Growth)EPS $2, P/E 50, growing 25%/yr
  2. 2Stock B (Value)EPS $10, P/E 10, growing 3%/yr
  3. 3Year 5 EPS A$6.10
  4. 4Year 5 EPS B$11.59
  5. 5If P/E stays the sameA: $305, B: $116
  6. 6If P/E compressesA at 25x = $152, B at 12x = $139
Takeaway

Multiple compression hurts growth far more than it hurts value. Growth bets on future earnings; value bets the current discount is mispriced.

Common mistakes

What to avoid

  • !Treating 'growth' and 'value' as a religion — great companies are both at different times
  • !Buying value traps — cheap stocks are sometimes cheap for good reasons
  • !Buying growth stocks at valuation peaks — multiple compression is devastating
  • !Ignoring rotation — pure portfolios have long stretches of underperformance
Self-check

Test yourself

Q1What's typically true about growth stocks vs value stocks?+

Growth: high P/E, fast revenue growth, no dividend. Value: low P/E, mature business, dividend.

Q2Why do rising rates typically hurt growth more than value?+

Higher rates raise the discount rate applied to future cash flows; growth depends more on far-future earnings.

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