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