Value vs Growth Investing: Differences & Performance

Let’s say you start looking out to plan your portfolio. You will want to combine different strategies and investment options. There are two main classic approaches that you need to consider in the mix - value investing vs growth investing.

The experts at Wall Street generally classify stocks under the labels of value or growth. But in reality, many stocks exhibit both elements. When creating a portfolio, it should blend growth and value stocks. But before you choose the different stocks, let’s understand what value and growth stocks are and what value investing vs growth investing is.

Table of Contents

What is Value Investing?
Pros and Cons of Value Investing
What is Growth Investing?
Pros and Cons of Growth Investing
Historical Performance
Stocks Performance
Differences
How Do Growth and Value Investing Overlap?
When Should You Choose Growth Stocks?
When Should You Choose Value Stocks?
Which is Better?
Which One to Choose?

What is Value Investing?

Value investors are always searching for those hidden pieces of gold - stocks priced low but hold promise. The stocks are undervalued for multiple reasons, such as a public relations crisis or a recession. These investors buy underpriced stocks and bet the price will increase when others catch on. These stocks generally have a lower price-to-earnings ratio but yield higher dividends. But a risk is involved - the price might not appreciate as expected.

[ Learn more about Value Investing ]

What are the Pros and Cons of Value Investing?

The following are the pros and cons of Value Investing:

Pros:

It generates higher profits. Value investing can generate spectacular returns.
Lower risks with higher rewards. The risk-to-reward ratio is favourable when the stock evaluation is done correctly.
Based on profound fundamental analysis rather than emotions, investors evaluate multiple metrics, such as P/E and D/E, that help them arrive at a stock's safe margin.
It makes the most of compounding. If you reinvest dividends, then returns increase exponentially.
Value investors take into consideration the company rather than the stocks.

Cons

Undervalued shares are difficult to identify as estimating the value requires expertise not all investors possess.
Value investing is time-consuming as sometimes investors need to hold their stocks for years.
Waiting does not always lead to gains. In some cases, owning stocks in a company can lead to gains, but it can also lead to a dead end. Investors can hold stocks for years but never see any returns.
Value investors need to be self-confident. This means they need to go against the market's flow.
Value investors can invest in all sectors that may underperform, but it is hard to make that prediction for the future. Committing funds to such sectors means a poor diversification of the portfolio, which can lead to risks.

If you want to become a professional in Value Investing, then enrol in the "Value Investing Course". This course will help you to achieve excellence in this domain.

What is Growth Investing?

Growth investors generally chase the market for high-risk stocks. If you’ve ever seen a disclaimer from a financial company, you know that past performances do not indicate future results. This is the exact opposite of what growth investment states.

Investors bet that a stock that already highlights better-than-average growth will continue to do so, making it an attractive investment option. The companies offering this stock are leaders in the market, and their stocks have an above-average price-to-earnings ratio with low or no dividends.

But when investors buy these stocks at a high price, there is always an added risk that the stock prices could fall.

What are the Pros and Cons of Growth Investing?

The following are the pros and cons of Growth investing:

Pros

Provide a high rate of returns in long-term investment plans.
Growth stocks are potential market leaders that provide constant returns that lead to an increase in earnings.
It does not require a high capital investment, and investors can slowly increase their exposure to these stocks when they have more funds.

Cons

These are high-risk stocks and are not ideal for investors with low-risk options.
Virtually no returns or negligible returns from growth investing in the short term.

Growth vs Value Investing - Historical Performance

When comparing the historical performances of value and growth investing, any result is evaluated in terms of the time, the volatility involved, and the risks endured to achieve them.

Value stocks are theoretically considered to have a low level of risk and volatility as they are part of a larger company. Also, even if these stocks do not return to a predicted target price, they still offer some capital growth. These stocks are also known to pay dividends.

On the other hand, growth stocks do not pay dividends but instead reinvest the retained earnings to expand the company. The probability that growth stocks will incur a loss is greater, particularly when the company is not able to keep up with growth expectations.

For example, let’s say a company showcases a product that is a dud. It is understandable that stocks will start plummeting when consumers use the product. This is why, in general, growth stocks have the highest potential rewards and risks for investors.

[ Learn the Successful Value Investment Examples ]

Value vs Growth Investing - Stocks Performance

Experts have debated the performance of Value investing vs. Growth Investing for decades. But in most cases, the performance of value stocks and growth stocks is cyclical in nature. The periodic outperformance of each stock is observed when you compare the Russell 1000 growth index with the value index.

Time	Years	Annualized returns of Russell 1000 Growth Index	Annualized returns of Russell 1000 Value Index
1979-1988	10	10.9%	14.9%
1989-1999	11	22.5%	15.8%
2000-2008	9	-5.4%	0.5%
2009-2020	11	21.2%	10.7%
1979-2020	41	12.1%	12%

What are the Differences Between Value Investing and Growth Investing?

Category	Growth Stocks	Value Stocks
Meaning	Growth stocks are high-performing stocks that become market leaders.	Value stocks are stocks that are undervalued as per the market average.
Investors perception	Perceived by investors to increase higher sales and profit-oriented companies.	Value stocks with strong fundamentals are more or less stable in growth avenues.
Fundamental ratio	Growth stocks have a higher PE ratio with a higher PB ratio.	Value stocks have a low PE ratio, and the PB ratio is compared to value stocks.
Risks involved	The growth stocks are higher as they are highly volatile stocks.	Value stocks are safer stocks as they are not expensive and are less volatile.
Dividends	Growth stocks do not provide high dividends, and investors prefer to reinvest their profits to increase their business prospects.	Value stocks yield higher dividends and provide higher dividend yields.

How Do Growth and Value Investing Overlap?

Value and growth investing have their devoted followers, but multiple aspects overlap. Depending on your criteria, you will see stocks included in both. How is this possible? Nothing is set in stone.

For example, a stock can evolve in its lifetime from value to growth or vice versa. It is also essential to know that investors in the value vs. growth debate have the same goals but approach them differently.

Value investors generally look at companies that already have their brand value, but their stock prices are lower than normal.

On the other hand, growth investors look for companies with better future options and hope that the stock price will increase. Both investors are looking at the same destination, a higher return, but they are choosing different paths to get there.

[ Check out How Does Stock Market Work? ]

When Should You Choose Growth Stocks?

You do not see your investment portfolio as a source of income yet. This means that the money invested is not something you need right now.
You understand that the goals set in growth stocks take time to achieve.
You believe that you have picked the winning stocks in the competitive sector. Upcoming industries have hundreds of players vying for a share in the market. As a growth investor, you need to understand the technology these companies are based on while using your intuition to guide you.
It would be best if you had a high-risk tolerance.

When Should You Choose Value Stocks?

Your investments are part of your income.
You want to avoid value traps and prefer stable market prices.
You understand that a low stock price does not mean a company is undervalued. Some stocks can be cheap for multiple reasons. As a value investor,, you must understand when a company’s low evaluation indicates a shaky business.
You want your stocks to provide yields sooner rather than later.

Growth or Value Investing - Which is Better?

When it comes to Value investing vs. Growth Investing, the question of which style is better depends on multiple factors. Growth stocks perform better when interest rates are expected to stay low, but when rates increase, investors shift to value stocks. Similarly, growth stocks have been performing well in recent years, but value stocks have a long-term record of growth.

Growth Stocks Continue Outperforming Value Stocks:

In the present market scenario, growth stocks have seen a nice increase. The last decade saw a rise in tech companies with massive opportunities. Big names like Apple, Alphabet, Amazon, and Netflix dominate the market share. Another major player in this industry is Microsoft. As per Ryan Johnson, CFA, director of Portfolio Management and Research at Buckingham Advisors, Ohio, in the last 5 years ending 2019, large-cap growth outperformed large-cap value by more than 30%.

This happened as investors became fearful of short-term events that they were willing to pay higher rates for future years.

In the Long term, Value Investing Tends to Outperform Growth Investing:

But even though growth stocks win the battle in the short term, value stocks tend to outlast the war. Data collated by Nobel Prize laureate Eugene Fama and Dartmouth professor Kenneth French from 1927 to 2019 showcases that value stocks outperform growth stocks by 93%. But over a short period, value stocks outperform at lower rates.

When Will Value Outperform Growth Again?

The main question on investors' minds is when value stocks will outshine growth stocks. The short answer is that no one knows. The long answer also is that no one knows. But experts do know that the market will change. One significant sign to watch out for is inflation. Some traditional sectors that have outperformed are the rising energy prices that fueled inflation and helped increase investors' expectations for higher interest rates.

This rise will help boost energy and financial names in 2025 as investors price higher profits in these companies.

Value Investing or Growth Investing - Which One to Choose?

When you look at long-term performance, neither value nor growth stocks stand out as the obvious winners. However, when the economic conditions are favourable, growth stocks outperform value stocks by a smaller margin. Conversely, when the economy is in recession, value stocks perform better.

However, the economy moving into either extreme situation is not desirable. Being exposed to both value and growth stocks can help your portfolio perform better. However, it depends on the time: Where are you in your investor life cycle? How much time is left until you retire? What is the state of the economy?

Depending on these questions, choose an investment style consistent with your goals.

Conclusion

The decision to choose between Value investing and Growth Investing depends on the investor’s preference, risk tolerance, time, and investment goals. But you need to remember that over short periods, the performance of growth or value depends on the market cycle.

The debate of growth vs. value will always continue, but the evidence suggests that value stocks will outperform growth stocks better. If you plan on buying individual stocks, stick to fundamental investing principles that take the risk out of stocks.