The debate between growth and value investing has felt like finance’s version of life’s timeless arguments: Spider-Man vs Batman, crunchy vs smooth peanut butter, and cereal first vs milk first.
There’s really no right answer; choosing sides is mostly just a way to keep the argument going. But just like those debates, there’s a lot to be said for both value and growth investing, separately and together.
Growth investing focuses on companies with strong potential for rapid earnings and revenue expansion, while value investing seeks to identify businesses trading below their intrinsic value.
By understanding and using both strategies, investors can potentially better position their portfolios for stability, minimized volatility and long-term success, regardless of the market environment.
The heart of the debate: value and growth
To understand why these two strategies can work so well together, first it’s necessary to look at how they function individually. Let’s look at the theory behind each approach.
The bargain hunter's mentality
Value investors are the ultimate bargain hunters. They scour the market looking for companies that are trading for less than they believe they are actually worth. Their goal is to buy a dollar for sixty cents. This strategy requires patience, nerves of steel, and the ability to ignore what everyone else is doing.
Dive into a beginner's guide to value investing, and you’ll see that the fundamental objective is to find established companies with solid fundamentals that the broader market is temporarily overlooking. It sounds like a great idea, but this strategy is not without risks. Sometimes a cheap stock is cheap for a reason, and that’s one of the classic pitfalls of value investing.
The visionary's mindset
Growth investors, on the other hand, are visionaries. They are less concerned with what a company is making today and laser-focused on what it could make tomorrow. They look for companies that are expanding revenue and earnings at an explosive rate.
These investors are willing to pay a premium today based on their belief that the company will dominate its industry in the future. The most successful growth strategies often look for companies at the intersection of quality and growth. They want businesses that not only promise massive expansion but also have the economic moats to protect their gains.
Two sides of the same coin: differences and similarities
At first glance, value and growth seem like polar opposites. Value focuses on the current discount, while growth focuses on the future premium. Value investors look at cash flow and dividends, while growth investors look at market share and revenue trajectories.
Despite these differences, both strategies share the same fundamental goal. Both types of investors are trying to beat the broader market by identifying a disconnect between a stock's current price and its true potential. They simply use different tools to measure that potential.
This leads to a crucial concept in modern finance: factor investing. Factors are the underlying characteristics that drive stock returns, with value and growth being two of the most common ways to screen the market. But like all factors, there is no single one that wins all the time.
Weathering the seasons: performance in different markets
History tells a fascinating story about how these two strategies take turns leading the market. Looking back over the last century of market data, you will see distinct seasons where one strategy drastically outperformed the other.1
When growth takes the lead
Historically, growth investing has tended to thrive in periods of low interest rates and low inflation. When borrowing money is cheap, companies can easily fund massive expansion projects. Furthermore, when inflation is low, the promise of future earnings is much more attractive to investors.
This played out remarkably during the 2010s. Following the 2008 financial crisis, central banks kept interest rates near zero for a decade. Growth stocks, particularly in the technology sector, crushed the broader market. Investors who entirely ignored growth during this decade missed out on one of the greatest bull runs in modern financial history.2
When value takes the lead
Value investing typically shines when the economic environment gets tough. During periods of high inflation, rising interest rates, or economic recovery, investors stop dreaming about future potential and start demanding current cash flows.
When the dot-com bubble burst in the early 2000s, growth stocks plummeted, but value stocks held their ground and generated solid returns over the next several years. We saw a similar shift in 2022. As inflation soared and interest rates spiked, high-flying growth stocks crashed, while boring, sound value stocks suddenly became the better place to hide.2
Multifactor investing: better together
Because value and growth can perform well in entirely different economic environments, they naturally should have low correlation. This can be the secret sauce for building a diversified portfolio.
By blending these two strategies, you engage in multifactor investing. You’re no longer betting on one specific economic outcome. Instead, you are building a portfolio designed to weather all market conditions.
If there’s a sudden spike in inflation, value stocks can potentially act as a shock absorber. If the economy enters a prolonged period of technological innovation and cheap capital, growth stocks may act as the engine driving returns upward.
Combining value and growth investing helps smooth out portfolio performance. It can help stave off agonizing stretches of underperformance that come from tying portfolio returns to a single strategy and help minimize volatility.
The Takeaway
It’s a lot easier to say Spider-Man beats Batman from Gotham to Queens. But it’s a lot harder to look at the nuance of both sides and accept that maybe, just maybe, both sides could complement each other.
For investing, no one has to choose a side in the value vs growth investing debate. By recognizing the unique merits of both, it’s possible to build a portfolio that’s designed to endure market downturns as well as capture explosive upside.
Ready to explore how to put these concepts into practice? Explore our lineup of funds to see how we put value and growth strategies to work in ETFs.
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