Growth, value are indefinite terms

By DAVID MOON, Moon Capital Management, LLC
January 15, 2006

A little over a week ago, the Wall Street Journal printed a teaser on page C1 for a mutual fund article that would appear later in the paper. The tease read: “Value is outracing growth.” The actual article was featured on the front of a later section of the same paper, with a picture of some race cars and the headline “Growth Funds Pull Into the Lead.”

The discrepancy brings to mind an old joke about a series of interviews in which accountants are asked for the answer of two plus two. Most of the accountants answer, “Four.” One accountant answers, “What do you want it to be?” He’s hired.

So which is it? Is value outracing growth, or are growth funds pulling into the lead? Well, Mr. Accountant/Client, which do you want it to be?

During a deposition in which he dissected the different possible definitions of the word “is,” President Clinton reminded us that the answer to a question depends on the definitions of the words used to ask the question. What are “sexual relations”? What is value? What is growth? What are two? Two dozen?

Bill Miller, the long-time successful manager of the Legg Mason Value Trust, owns AOL and Google – two stocks that hardly anyone would characterize as value investments – in his portfolio. Miller is respected among all sorts of investment managers, including folks who are regularly described as value managers.

But he is as often poorly understood as he is admired. Among managers like Mason Hawkins, Ruane Cunniff, Third Avenue and Grantham Mayo – all well-respected, highly thought-of managers in the vein of the value-investing pioneer Benjamin Graham – none own AOL or Google, and I can’t imagine any of them owning these stocks at current prices.

Of course, each of these managers owns stocks that the others wouldn’t touch, either.

The point is that the difference in value and growth is in the eye of the beholder. Wally Weitz, a highly respected and successful mutual fund manager who is often classified as a value manager, owns Wal-Mart. Wait a minute. I thought Wal-Mart was one of those stocks that growth funds purchased. Aren’t value funds supposed to buy things like utility companies and railroads?

It all depends on what the definition of “is” is.

We don’t like to use the terms “growth” and “value” in our shop because they mean different things to different people. Likewise, we think it’s sort of silly to blindly dedicate a fixed portion of your portfolio to value or growth stocks. What does that even mean? It depends on who’s defining the terms.

It seems that a much better strategy is to put your money in companies that, given a reasonable set of assumptions, are worth more than their current prices. Call them anything you like.

Is this growth investing or value investing? I don’t know, and I don’t care. But I know that when you run headlines like the Wall Street Journal did, touting both growth and value investing, you’re always going to be right. And you’re always going to be wrong.

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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