Page 27 - DIY Investor Magazine | Issue 41

Acme Industrials trading at £300 per share, with the same earnings of £10 and expected growth rate of 20% would be considered too expensive by a GARP investor with a PEG ratio of 1.5 (£300 / £10 / 20).
GROWTH VS VALUE INVESTING
Growth investors want everything turbo-charged, whereas value investing targets older companies priced below their intrinsic value.
Over the long term, value investing has outperformed growth investing, although growth investing has been shown to outperform value investing more recently.
The Financial Times recently noted that growth investing had outperformed value investing over the last 25 years stating that since 1995, value mutual funds have returned 624%, while growth mutual funds have returned 1,072%.
Vanguard’s index funds show a similar trend; the Vanguard Value Index Fund has returned an average of 11.27% over the last five years compared with 17.41% for the Vanguard Growth Index Fund.
THE FUTURE OF GROWTH INVESTING
Neither strategy has outlasted the other indefinitely; some believe the recent trend favouring growth investing will run out of puff, with value stocks once again outperforming growth strategies.
Hybrid returns typically lag either a growth or value strategy in the short term, depending on which is outperforming the other; thus it can be psychologically difficult to stick to a hy- brid approach when more money is being made elsewhere. However, over time such an approach can outperform an investor switching between growth and value in an attempt to time the market.
CONCLUSION
Growth investors seek to take maximum advantage of companies early in their business cycle; by targeting companies in high-growth industries they can benefit as companies rapidly grow their revenues, earnings and cash flow.
However, a growth strategy may not be a silver bullet; growth companies can be very expensive and in addition, abrupt shifts in market sentiment can send growth company values falling as they did during
the dot-com crash.
27 DIY Investor Magazine
· August 2024
Recent macro economic trends have favoured growth investing; low interest rates gave easy access to cheap capital – the lifeblood of fast-growing companies – although money has recently become more expensive.
Equally, the pandemic may have favoured technology com- panies in growth mode; more shoppers went online and as companies embrace remote working, technology demands increase to sustain this shift.
Forecasts of the end of the ‘tech bubble’ have filled count- less column inches, and despite the current purple patch for growth stocks, history says that nothing lasts forever.
How and when the current trend will end is unknown;
the bursting of the dot-com bubble was sudden and caused severe financial pain for many investors, although if life really has changed forever, maybe the current valuations for firms supporting the ‘new-normal’ may not turn out to be quite so fanciful as those in the early naughties which saw the Nasdaq index fall by 76.81%
A HYBRID STRATEGY
There’s no need to pursue an exclusively growth or value investing strategy; a better choice could be to a hybrid, buying companies that fall into both value and growth categories; this could be as easy as investing in an
index tracking fund.
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