A Question of Style -- Don't Fall for the Growth/Value Debate

Lots of ink used in the debate over whether you should buy "growth" or "value" stocks. In the mid to late 90's so called growth stocks outperformed so called value stocks dramatically. Then the bubble burst and value stocks trumped growth stocks -- at this point value has outperformed growth by around 100% since 2000. Many believe its time for growth to outperform again -- year to date growth is outperforming.

First point to make is that the question of what is a growth stock and what is a value stock is more of a marketing question -- the Frank Russell company is the one that determines what stocks go into the Russell 1000 Growth index and the Russell 1000 Value index. Frank Russell Company's background is as a consultant for institutions trying to pick money managers -- sure sounds like marketing doesn't it?

From an investment point of view you can't value a stock without making a determination of future growth prospects. Quickest way to lose money in the stock market is to buy the fastest growth company without regard for its valuation. In the mid 90's tech stocks were cheap but they were considered growth stocks -- hence the idea that growth outperformed value dramatically. The gap was so wide only because people labeled the stocks wrong.

Why is value underperforming this year? because financials -- which make up 35% of the Russell 1000 Value index vs. less than 10% of the growth index are a poor performing group this year. Are financials really value stocks? they sell at low price to earnings but they always do -- they may be cheaper vs. other industries but since they always are cheaper it makes more sense to know where they are vs. their own history -- not cheap.

Why has value done so well over the last several years? Because many so called value industries -- energy, materials, industrials and for a time financials -- had much faster growth than so called growth areas like tech, health care, etc. Finally, many growth managers are starting to buy energy, material and industrial companies Its about time -- the secular value investor bought energy in 2003 -- the trend was obvious then and the stocks were much cheaper. Skate to where the puck is going to be not to where its been.

Don't pay attention to labels -- evaluate all industries and companies based on their growth and valuation characteristics to find the most attractive investment choices. don't fall for the trap of what growth or value are supposed to be -- go to where the growth will be before others figure it out. That's one key to success -- if you can identify future growth before others, you can buy the stocks at attractive valuation and ride their growth.