A hotly debated topic in the world of financial investments in the medium and long term is to choose growth company stocks or undervalued relative to their intrinsic value stocks. It is just another way to classify companies and help us see if it is what we need in our portfolio.
The growth investing basically focuses on finding companies whose future growth is not yet thought reflected in the share price. Even though these already have high ratios of return by dividend. As we have seen in older posts, in Spain there are some known examples of this type of stocks, such as Inditex or Viscofán. But an international and well known company to show growth would be apple.
The value investing meanwhile, as we said earlier, is to find companies that are undervalued by certain causes to their intrinsic value, and leverage that market inefficiency to buy low and sell when we believe reached the top value. They tend to have low return ratios, but as soon as their price comes back to normal levels, profits are made via price.
Of course there are also examples of this in our small bag, as we have seen recently with almost the entire financial sector. So the issue is controversial among investors, even there is an intermediate philosophy called GARP, for its acronym in English (Growth At a Reasonable Price), which translates as buying growth companies at a reasonable price.
What is the best system?
We can now make a comparison based on the numerous studies attempting to prove that a system is better than another.
For example, see the chart above authored by Ken French and winner of the Nobel Prize in Economics 2013, Eugene Fama, we have the comparative $ 1 invested in 1927 in value stocks for small companies (small value), value stocks for large companies (large value), growth stocks for small companies (small growth) and growth stocks for large companies (large value).
In theory, up to 2005 which have performed best were the value of small businesses and those that have done worse are the growth of large companies. We say in theory because we can find studies showing that during certain periods of time growth stocks have outperformed the value type.
Another issue would be to see what exactly all these authors a growth stock, one of value, how they calculated the intrinsic value, etc. Parameters that can vary greatly from one another.
Then of course we have a lot of funds that invest in the market following an investment philosophy or another, with categories ranging from value investing in small cap companies (value small cap) to companies large-cap growth (growth large cap). So if you don’t want to do it yourself you can always identify the best fund to enter following your patterns.