No Value in the Growth vs. Value Debate

By DAVID MOON, Moon Capital Management
June 26, 2005

In the children's classic Through the Looking Glass, Lewis Carroll introduces us to one of the more astute financial commentators of the 19th century: Humpty Dumpty. ''When I use a word,' Humpty Dumpty said in a rather scornful tone, 'it means just what I choose it to mean ' neither more nor less.''

The folks who insist on dividing the investment world into two camps ' growth and value ' don't understand the simple lesson offered by Professor Dumpty. The distinction between value and growth means just what an individual chooses it to mean ' neither more nor less.

Some people categorize businesses as either growth or value investments based on their industry. Computer manufacturers and pharmaceuticals producers are growth companies; industrials and utilities are value companies. By these definitions, Caterpillar is a value company and Microsoft is a growth company. Over the last five years, Caterpillar's earnings increased at a compound annual rate of 16.7 percent, compared to 1.0 percent for Microsoft. Which is the growth company?

A recent Wall Street Journal article used the phrase 'growth-stock bellwethers' to describe PepsiCo, Procter & Gamble and Eli Lilly. But each of these stocks is owned by well-known 'value funds,' at least as described by services such as Morningstar.

Some analysts distinguish between value and growth on the basis of valuation: growth is high P/E and value is low P/E. But plenty of so-called value funds own Comcast, a stock with a price-to-earnings ratio of 69.

There is plenty of overlap among funds with supposed different styles, even within the same firm. Recently, ExxonMobil, General Electric, BankAmerica and AIG were simultaneously among the 10 largest holdings in two Fidelity Advisor funds: Growth Opportunities and Equity Value.

Our firm is often described as employing a value investment style. At times, we're guilty of falling into the same word games. We will sometimes use the 'V word' simply because we think it might help some people understand what we aren't. But it does nothing to help people understand what we are.

Advisers and consultants love to recommend sprinkling portfolios with funds that include both the value and growth monikers. A generous description of this gambit is that it overdiversifies a portfolio. A more cynical explanation is that it allows an adviser to avoid making any specific recommendations.

Even respected experts have their own definitions of growth and value. The legendary indexing proponent John Bogle, founder of the Vanguard Group, argues that the long-term performance difference between the two styles is negligible, only two one-hundredths of a percent a year. The experts at Ibbotson Associates, however, calculate that 'value stocks' (whatever that means) outperformed 'growth stocks' by a full 3.2 percentage points a year over the last 70 years.

In the absence of a significant stock market price movement, commentators are apt to seize on some theme. They have to write about something. When the discussion turns toward a potential shift in the attractiveness between value and growth investing, don't get suckered. The debate is about definitions, not performance.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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