Firstly, I want to wish all readers a very happy and prosperous 2020.
The new year has seen equity markets continue their seemingly unstoppable march higher, with major indices hitting new all-time highs on a near-daily basis. Given the substantial outperformance of ‘growth’ stocks over the past decade – and 2019 in particular – there is currently a robust debate around whether it’s time to switch to a more ‘value’ oriented portfolio. In my view, this is an over-simplification of the issue, given that it reduces both concepts to quantitative ‘factors’ driving markets. In reality, growth and valuation are two sides of the same coin when selecting stocks for long-term investment.
To take a step back, ‘value’ investing is broadly defined as trying to determine the intrinsic value of a future stream of cash flows, and paying less than that value to acquire rights to that stream of cash flows – buying $1.00 for $0.80, in essence. In contrast, ‘growth’ investing is generally defined by what it is not: ‘value’ investing. I think this interpretation lacks nuance. I have yet to encounter the value investor who doesn’t believe the future growth potential of a business they own is not reflected in the current stock price, nor a growth investor who would not prefer to pay less than intrinsic value for future potential growth.