What is better: growth investing or value investing? If you’re asking that question, you’re looking at things the wrong way. Growth and value are not two different camps – they’re two sides of the same investing coin. If you were to pitch me an investment idea that has growth but lacks a value price relative to that growth, it’s not a good investment in the same way a coin that’s missing the tails side is probably a counterfeit.
On the flip side, fundamental valuations should always account for realistically obtainable growth; to write it off completely is a cop out, for growth and value are not competing foes but allies that work together to build a good investment case. If you can find a company that is growing its ability to generate earnings while simultaneously sporting a cheap valuation, you have found an ideal investment.
Warren Buffett wrote about the misguided logic that fuels the growth/value divide in his 1992 Chairman’s Letter:
…[M]ost analysts feel they must choose between two approaches customarily thought to be in opposition: “value” and “growth”. Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing.
We view that as fuzzy thinking (in which, it must be confessed, I myself engaged some years ago). In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.
Warren Buffett also discussed growth and value in the 2001 Berkshire Hathaway annual meeting: