Executive Summary: In this article, I analyze the data (both index and fund returns) to determine whether value stocks or growth stocks are superior. I find that while both styles have had their moments of outperformance, neither consistently outshines the other over time. The key takeaway? Instead of choosing sides, focus on maintaining a diversified portfolio that includes both growth and value stocks.
To be a growth stock investor or not to be. That is the question.
Based on recent history, the answer is obvious. Growth stocks—companies with fast-growing revenues (and maybe profits)—are the way to go. However, academics will tell you that value stocks—those with low price-to-earnings ratios, for example—outperform their more expensive and growth-y brethren over time.
So, which is it? Is it better to be a growth investor or a value investor?
That’s the question I’m going to try to answer today.
To shortcut the discussion before diving into the details, let me say that neither can be reasonably assured of outperforming the other (or the market) over any given month, year or multi-year period. Each style will have its time in the sun and time in the doghouse. At the end of the day, it’s not about being a growth or a value investor, but about spending time in the markets—eschewing the labels while holding a well-diversified portfolio. That’s what I do.
Now, let’s get into the meat of the argument.
Key Points
- Defining growth and value is hard. Even index providers disagree on what makes for a growth or value stock.
- Value stocks beat growth stocks over time. But growth stocks also beat value stocks over time. It just depends on which time you are looking at!
A Rose by a Different Name
Before diving into the performance history, let’s acknowledge that there isn’t a definitive answer to just what constitutes a growth or value stock. If you pop the hood on Vanguard’s value and growth index funds, you’ll see how muddy the waters are.
Take Disney, for example. If you ask CRSP, Disney is both a growth stock and a value stock—you’ll find it in Growth ETF’s (VUG) and Value ETF’s (VTV) portfolios. But according to S&P, the “Mouse” is only a value stock.
Conversely, consider Visa and Mastercard. According to S&P, the two payment giants are both value and growth stocks—they are held in S&P 500 Value ETF (VOOV) and S&P 500 Growth ETF (VOOG). However, CRSP will tell you that they are growth stocks.
The “growth” and “value” labels are defined by the eye of the beholder. One investor may own a company for its “growth potential,” while another may own that same company’s stock because it’s “cheap.”
The blurred lines between growth and value stocks also extend to those who are often categorized as either growth or value stock pickers. Take the PRIMECAP Management team as an example.
While often considered “growth” managers because the stocks they own tend to grow their earnings at above-market rates while paying little in the way of dividends, the team’s aim is to buy undervalued stocks facing near-term issues and then hold onto them for years and years—attributes typically associated with value investors. If the PRIMECAP team’s analysis is correct, these stocks eventually look like and perform like growth stocks, with earnings outpacing the market’s earnings.
Should we characterize the PRIMECAP team as growth investors or value investors? My answer: Who cares? What is far more critical is whether they have a disciplined, repeatable investment process that has outperformed over the long run. (And they do.)
Again, this argues for ignoring labels when building your portfolio.
I’ve also got some data to back up my claim that playing the growth or value game is a distraction for long-term investors. I’ll show you that growth or value outperform one another depending on the time period and that neither is superior—even over the span of decades.