- We explain whether value stocks or growth stocks have performed best over time.
- Since each strategy can have stretches of underperformance, it can be hard to know which is best right now.
- We propose two smart ways to buy the best of both value and growth stocks in your portfolio.
What if you could have both?
Deciding between growth stocks and value stocks is an age-old struggle for investors. But I have a solution that pulls together the best of both worlds.
Before I explain, let’s cover some basic definitions.
Growth Stock Definition
In general, growth stocks are companies that are expected to have unusually high growth in their future sales and/or earnings.
Investors who buy growth stocks often believe growth companies will deliver strong financial results far into the future as they find an ever-expanding market for their products.
We explore the definition of growth stocks extensively and provide 30 examples in our article, What are Growth Stocks? Growth Stock Definition + 30 Examples.
Value Stock Definition
“Value stocks” describes an investing strategy that looks for companies currently trading below what they’re really worth. In other words, value investing tries to buy good stocks on the cheap.
We explore the definition of value stocks extensively and provide 30 examples in our article, What are Value Stocks? Value Stock Definition + 30 Examples.
When it comes to the question, “Which is better; investing in growth stocks or value stocks?”, there are really two answers: One is a simple answer and the other is the best answer.
Growth vs Value: Which Is Better? (The Simple Answer)
In general, value investing is probably less risky. It tends to focus on more conservative stocks and has more robust research showing it can outperform the market. Growth investing can be more risky if you’re pursuing lots of “story growth stocks” instead of “steady growth stocks.”
As a reminder, story growth stocks are when investors believe the company is going to grow very rapidly over the next 5-10 years and somehow substantially disrupt or take over an entire industry.
And steady growth stocks are companies that deliver steady above average sales and earnings growth year after year. They may not have an incredible future upside like story growth stocks, but they have found a formula for steady profitable growth and can often deliver through good times and bad.
Research and experience suggests that story growth stocks are hit or miss (mostly miss) and steady growth stocks are a great long-term investing strategy on par with value investing.
Looking back at 100 years of in-depth research, there are both value investing and growth investing strategies that have performed very well.
However, each approach has had stretches of outperformance and stretches of underperformance. For example, over the last five years, value investing has performed poorly while growth investing has performed strongly. This is because we’ve been in a growth-driven economy with low interest rates, fast earnings growth, and strong consumer spending.
So while both value stocks and growth stocks can perform well, if you invest in one or the other, be prepared for stretches of outperformance and stretches of underperformance.
A good way to balance this is to own both kind of stocks in your portfolio. If you have a healthy mix of value and growth stocks, it’s likely that while one type of stock is underperforming, the other will outperform.
If you want to get fancy, you can even try to shift the mix of value vs growth stocks based on the economy. For example, growth stocks have performed well for the last five years but some investors believe our great bull market is coming to an end. Maybe it’s time to shift a bit more towards value stocks?
However, research shows it’s difficult to know exactly when the market is going to shift, so I wouldn’t recommend getting too fancy. But you can shift your mix of value vs growth stocks a little bit based on economic trends and your personal appetite for risk.
Growth vs Value: Which Is Better? (The Best Answer)
While it’s a good strategy to own a healthy mix of value and growth stocks, I think there’s an even better strategy: buy stocks that are considered BOTH value and growth stocks.
Wait. How is that possible?
First, take a steady growth stock like Apple (AAPL), which has delivered an average of 8% sales and earnings growth per year over the last five years, all while buying back shares and boosting their dividend by 45% per year over the same period.
Now, imagine that Apple stock is currently undervalued (I’m not saying that it is, but just pretend for this example). Imagine the market has overreacted to a six month delay in one of their new product launches and sold off the stock by nearly 30%. Based on your research, Apple shares are almost certainly undervalued.
If you bought Apple stock, you’d now have a chance to invest in both a value stock AND a growth stock. Apple’s underlying business is certainly a steady growth stock. And if your valuation analysis is right, you can now buy that growth business on sale.
My experience (and much research) suggests this “two for the price of one” approach is very powerful, and better than seeking out just growth stocks or just value stocks on their own.
Think of it as trying to buy a great business at a discount. A rare opportunity, but with 8,700+ stocks trading in the U.S., certainly not impossible to find.
In our Quality Stock Investor newsletter (coming soon), we buy exactly these types of stocks; proven steady growth stocks trading at a discount to their fair value. We also look at several other characteristics, such as good management, shareholder-friendly policies, and market share.
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