Value vs. Growth

The ancient battle between Value and Growth investing continues, with Barron's weighing in with its take on the issue. It's starting to remind me of the Hundred Year's War between France and England or that Star Trek episode where two planets have been at war for five hundred years.

Value Investing has underperformed growth investing over a six month or three year horizon, but Value Investing outperformed in the second quarter of 2009.

The problem with this and all other like statistics is that it artificially categorizes all cheap stock as Value stocks. Barron's uses the Russell indexes to measure performance, and specifically mentions Bear Stearns, Citigroup (C), Freddie Mac (FRE), General Motors, Macy's(M) and JCPenney(JCP) as being particularly harmful to Value investors.

Just because a stock is cheap doesn't make it a Value stock. This is pretty basic and is one of the first things any investor learns after picking up a book written on Value investing.

The Ten Commandments of Growth Investing

And Behold...God cast out the Growth Investor from the Heavens and denied them eternal life and forced them to walk the earth for all eternity for they poisoned the minds of thine fellow investors.

I. Thou shalt use invented ridiculous growth rates to justify ridiculous valuations for Stocks in thine portfolio.

II. Thou shalt merge your Growth Mutual Fund into another so as to obscure your long term investment performance after an asset bubble bursts.

III. Thou shalt pretend to understand the business of high tech companies.

IV. Thou shalt purposely confuse fundamental analysis and momentum investing, and ascribe thy success to the former when it is really the latter.

V. Thou shalt memorize the following phrases "it's different this time, it's a new era, a new paradigm."

VI. Thou shalt create new valuation metrics to justify stock purchases such as enterprise value per eyeballs, etc.

VII. Thou shalt exalt in the following terms: earnings guidance, whisper numbers, EBITDA, non GAAP earnings, one time charges, goodwill, intangible assets and price to sales (because most of thou stocks have only sales and nothing else).

VIII. Thou shalt believe that all businesses thy invest in are secular growth when in fact all businesses are cyclical.

IX. Thou shalt intentionally use very low discount rates when calculating discounted cash flows in order to boost valuations, and thy shall use double digit terminal growth rates as well for the same reason.

X. Thou shalt focus on whatever time horizon suits you.


Ten Commandments of Value Investing