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For someone that is not an investor, would someone please explain the difference between growth and value stocks? My initial guess is that value stocks are und

For someone that is not an investor, would someone please explain the difference between growth and value stocks? My initial guess is that value stocks are underpriced, while growth stocks are priced correctly for current value, but has significant growth potential How close is that?

H8crilA 7y ago
Value investing: you try to come up with an intrinsic valuation of a security and buy if market price is, say, 60% or lower of that valuation. Famous examples: Benjamin Graham, Warren Buffet, Michael Burry. Growth investing: buy whatever grows (earnings, revenue, even DAU are all flavors of growth investing). VC investing/startup investing is classic growth investing. PG on the topic: http://www.paulgraham.com/growth.html http://www.paulgraham.com/growth.html Growth stocks are usually overpriced because of hype (looking through rose glasses), but can still be good, as the last 10 years shows.
- H8crilA 7y ago
  Just to throw some data into the mix: the biggest difference is not between growth or value. It's between US and ex-US equities: https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=1&timePeriod=4&startYear=1972&firstMonth=1&endYear=2019&lastMonth=12&calendarAligned=true&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&benchmark=VFINX&asset1=LargeCapValue&allocation1_1=100&asset2=LargeCapGrowth&allocation2_2=100&asset3=IntlDeveloped&allocation3_3=100&total1=100&total2=100&total3=100 https://www.portfoliovisualizer.com/backtest-asset-class-all...
mruts 7y ago
Yeah that's a pretty good guess. Growth generally means a company is expensive relative to it's earnings, profits, or book value. Ratios like P/E (price to earnings), and P/B (price to book) can be used to identify/classify a growth company. Higher these ratios, the higher the stocks exposure to "growth". A value company is the exact opposite, a stock with low ratios. As you might have suspected, value has been clobbered in the last 10 years, and a bunch of Chicago school economists are pissing their pants (Fama, French, etc). V
- SubiculumCode 7y ago
  Could it be that we are better these days at more accurate valuation? (e.g. better analytics?)
  - mruts 7y ago
    Certainly the proliferation of alternative data (online news sentiment, satellite imaginary, GPS location data, etc) has made finding those cheap harder to find because they are probably more fairly priced. Buffet has said that he switched his strategy from finding fair companies and a great price to great companies at a fair price, probably because of this increase of transparency. Also, there are fewer public companies today than in the past, due to consolidation or better liquidity in secondary (private) markets. If we ranked companies by P/E nowadays, and look at the cheapest stuff, it's often not worth buying. We're talking about the garbage companies that no longer can compete anymore. I think this is partially why value in underperforming. It's picking up all of this garbage that is actually fairly valued, and not cheap because people forgot about it. Funds like AQR do use value, but then often combine it with a factor that has a negative correlation with it, like momentum. Obviously you wouldn't want to combine value and growth (as they should have a close to -1 correlation, depending on how you define it), but adding a factor that has some negative correlation is very powerful. An example of using the combination of these two factors might work like this: I see a company that looks relatively cheap, but not cheap enough for a value strategy. I think find it has an upward momentum (the price is rising), though only moderately. Alone, neither of these signals would be strong enough for a buy. But together, I might infer that the company is turning itself around and things are going to get better.
- dade_ 7y ago
  Neither P/E or Book value are useful metrics for value investing. Please read security analysis...
  - mruts 7y ago
    Would you prefer book to market? That's what Fama and French used. All of these ratios are related to the value factor, I didn't say you need/should use on or another.
kgwgk 7y ago
https://www.msci.com/documents/1296102/1339060/Factor+Factsheets+Value.pdf https://www.msci.com/documents/1296102/1339060/Factor+Factsh... "The foundation of value investing is the notion that cheaply priced stocks outperform pricier stocks in the long term." "Value has several dimensions: the stock price as a multiple of company earnings, price as a multiple of dividends paid, price as a multiple of book value, and other such “ratio descriptors.” The idea is that investors in aggregate are too optimistic about the stocks with positive outlook (everybody wants them, they get overvalued) and too pesimistic about the stocks with negative outlook (nobody wants them, they get undervalued). In principle, by investing on the stocks that are currently "cheap" (and undervalued in average) you get better returns as they won't do (in average) as bad as discounted by their stock price. What I described above is the "value factor" (used to classify stocks in the value/growth axis). You can also do "value investing" looking at the fundamentals for a company and making sure that that particular company is undervalued. The factor approach is a systematic way to do that without a detailed analysis for each company: you try to identify the measures that allow you to capture undervalued stocks in average.
chrmeredith23 7y ago
SubuculumCode4, the way I think of this is that the price of any stock is related to the value of its expected future earnings. For value stocks, the bulk of that value is in the near term earnings. For growth, the value is in the long term earnings. The reason that value stocks outperforms growth stocks in the long term is that people think the distress on value is worse than it is, and overestimate how good it will be for a growth stock. The reason this is different for now, and in 1926-41, is that the growth stocks executed their business model. And value stocks didn’t revert back from distress. Hope this helps, Chris

H8crilA 7y ago

Value investing: you try to come up with an intrinsic valuation of a security and buy if market price is, say, 60% or lower of that valuation. Famous examples: Benjamin Graham, Warren Buffet, Michael Burry. Growth investing: buy whatever grows (earnings, revenue, even DAU are all flavors of growth investing). VC investing/startup investing is classic growth investing. PG on the topic: http://www.paulgraham.com/growth.html http://www.paulgraham.com/growth.html Growth stocks are usually overpriced because of hype (looking through rose glasses), but can still be good, as the last 10 years shows.

H8crilA 7y ago
Just to throw some data into the mix: the biggest difference is not between growth or value. It's between US and ex-US equities: https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=1&timePeriod=4&startYear=1972&firstMonth=1&endYear=2019&lastMonth=12&calendarAligned=true&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&benchmark=VFINX&asset1=LargeCapValue&allocation1_1=100&asset2=LargeCapGrowth&allocation2_2=100&asset3=IntlDeveloped&allocation3_3=100&total1=100&total2=100&total3=100 https://www.portfoliovisualizer.com/backtest-asset-class-all...

mruts 7y ago

Yeah that's a pretty good guess. Growth generally means a company is expensive relative to it's earnings, profits, or book value. Ratios like P/E (price to earnings), and P/B (price to book) can be used to identify/classify a growth company. Higher these ratios, the higher the stocks exposure to "growth". A value company is the exact opposite, a stock with low ratios. As you might have suspected, value has been clobbered in the last 10 years, and a bunch of Chicago school economists are pissing their pants (Fama, French, etc). V

SubiculumCode 7y ago
Could it be that we are better these days at more accurate valuation? (e.g. better analytics?)
- mruts 7y ago
  Certainly the proliferation of alternative data (online news sentiment, satellite imaginary, GPS location data, etc) has made finding those cheap harder to find because they are probably more fairly priced. Buffet has said that he switched his strategy from finding fair companies and a great price to great companies at a fair price, probably because of this increase of transparency. Also, there are fewer public companies today than in the past, due to consolidation or better liquidity in secondary (private) markets. If we ranked companies by P/E nowadays, and look at the cheapest stuff, it's often not worth buying. We're talking about the garbage companies that no longer can compete anymore. I think this is partially why value in underperforming. It's picking up all of this garbage that is actually fairly valued, and not cheap because people forgot about it. Funds like AQR do use value, but then often combine it with a factor that has a negative correlation with it, like momentum. Obviously you wouldn't want to combine value and growth (as they should have a close to -1 correlation, depending on how you define it), but adding a factor that has some negative correlation is very powerful. An example of using the combination of these two factors might work like this: I see a company that looks relatively cheap, but not cheap enough for a value strategy. I think find it has an upward momentum (the price is rising), though only moderately. Alone, neither of these signals would be strong enough for a buy. But together, I might infer that the company is turning itself around and things are going to get better.
dade_ 7y ago
Neither P/E or Book value are useful metrics for value investing. Please read security analysis...
- mruts 7y ago
  Would you prefer book to market? That's what Fama and French used. All of these ratios are related to the value factor, I didn't say you need/should use on or another.

kgwgk 7y ago

https://www.msci.com/documents/1296102/1339060/Factor+Factsheets+Value.pdf https://www.msci.com/documents/1296102/1339060/Factor+Factsh... "The foundation of value investing is the notion that cheaply priced stocks outperform pricier stocks in the long term." "Value has several dimensions: the stock price as a multiple of company earnings, price as a multiple of dividends paid, price as a multiple of book value, and other such “ratio descriptors.” The idea is that investors in aggregate are too optimistic about the stocks with positive outlook (everybody wants them, they get overvalued) and too pesimistic about the stocks with negative outlook (nobody wants them, they get undervalued). In principle, by investing on the stocks that are currently "cheap" (and undervalued in average) you get better returns as they won't do (in average) as bad as discounted by their stock price. What I described above is the "value factor" (used to classify stocks in the value/growth axis). You can also do "value investing" looking at the fundamentals for a company and making sure that that particular company is undervalued. The factor approach is a systematic way to do that without a detailed analysis for each company: you try to identify the measures that allow you to capture undervalued stocks in average.

chrmeredith23 7y ago

SubuculumCode4, the way I think of this is that the price of any stock is related to the value of its expected future earnings. For value stocks, the bulk of that value is in the near term earnings. For growth, the value is in the long term earnings. The reason that value stocks outperforms growth stocks in the long term is that people think the distress on value is worse than it is, and overestimate how good it will be for a growth stock. The reason this is different for now, and in 1926-41, is that the growth stocks executed their business model. And value stocks didn’t revert back from distress. Hope this helps, Chris