From an investment perspective, there are broadly two approaches to buying stocks. There is the Growth approach versus the Value approach. Simply put, the growth approach chases growth while the value approach chases value. Indian investors and fund managers have typically veered between these two forms of investing. Before getting into the nuances of what these investing styles mean, let us look at a quick chart. The chart below depicts how the NSE Growth index has performed versus the NSE Value index. For easier comparison, both the indices have been factored to a base of 100. As the comparative chart depicts, there not much choose from over the last one year. Of course, the value index has marginally outperformed the Growth index over the last one year. That could be more because the growth index contains a generous sprinkling of pharma and FMCG stocks, which despite above average growth have not been the darling of the bourses. On the other hand, there are the value stocks that are dominated by banks and oil companies that have performed exceedingly well in the last one year

Deciphering the idea of growth stocks


Deciphering the idea of value stocks


Practically speaking; growth versus value investing
investment portfolio

Basic cautions in the growth versus value argument

While buying growth stocks one needs to be cautious of disruptive technologies. Many businesses like electronic hardware, hotels and automobiles are all being impacted by disruptive technologies. If you are buying these stocks from a growth investing perspective, you need to be cautious of how disruptive technologies could impact future growth and ROE of your companies.

If you are focused on value stocks, then you need to be cautious of the Value Trap. Many companies with low P/Es and low P/BVs tend to sustain at low valuations for long due to larger fundamental problems that may not be apparent. Investors, therefore, need to be doubly careful while buying value stocks at bargain prices.

Timing matters a lot! Here we are referring to the market conditions when you are taking the investment decisions. Typically, when markets are quoting at the lower end of the valuation range, value investing will tend to work better. That is because the downside risks of these value stocks become almost negligible.

Lastly, growth stocks tend to outperform when the macroeconomic cycle and corporate performance are maintaining a steady positive clip. Then markets attach more importance to buying growth rather than buying value.

The value and growth approach are more often than not, complementary rather than being competitive. If implemented at the right time with the right checks and balances, both these approaches work to perfection!