Thursday, June 22, 2006

Value vs growth

In investment lingo, one way of classifying stocks is to label them as either value stocks or growth stocks. Some other ways include large cap vs small cap, NC16 vs R21.

Value stocks are what we have been discussing all this while, stocks that trade below their intrinsic value, come from understandable and mundane industries (insurance, utilities, consumer staples), low PER, low PBR, stable earnings streams etc.

At the opposite end of the spectrum are growth stocks. These are stocks with a lot of potential but they may or may not make their mark. They usually have high PER and high PBR, weak earnings, from hot sectors like Tech, Energy, Biotech etc. But they are attractive because their intrinsic value in the future can be 2, 5 or 10 times higher than today's price. Microsoft was a growth stocks in the 80s, early 90s.

Without considering valuations (i.e. let's not think about prices and whether if it's value for money), let's try to look at growth and value stocks in another perspective:

Growth stock = Porsche, sexy and fast, but prone to accidents
Value stock = Volvo, ugly but safe, reliable and down-to-earth

Buffett thinks that classifying stocks as value or growth is not important because they are simply on different sides of the same equation. A true growth stock is essentially a value stock in disguise.

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