Growth vs Value Investing. Which is Better?

Hey guys, welcome back to the channel! In this video, we are going to be comparing two corners of the investing world: that is, growth investing versus value investing. We're going to have a look at what each one is about, compare the two, and also look at some of the world's best investors to see what approach they are currently using to generate substantial returns. So, hope you enjoy the video! Let's get stuck into it. Leave a like on the video if you do enjoy it, but for now, let's get started.

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So, let's start out with a couple of definitions. Let's see what is the difference between growth investing and value investing, and of course, let's turn to Investopedia to see what they have to say. Investopedia says growth stocks are those companies that are considered to have the potential to outperform the overall stock market over time because of their future potential. So, these companies have found something that's really working; they are filling a need, they are gaining customers, and they are growing.

What about value investing? Well, the same article says value stocks are classified as companies that are currently trading below what they are really worth, and will thus provide a superior return. So, this way of investing is more about buying the stocks that, for one reason or another, are really cheap, and then holding them until the market realizes that, actually, yeah, they are cheap; they deserve to be a little bit pricier than they are, and it readjusts the prices accordingly. And that's how value investors make their money.

Now overall, so that's the difference between growth and value. Now, ultimately, the dilemma that investors face between the two arguments or the two schools of thought is this: normally, growth stocks are really expensive, and on the flip side, value stocks normally, there's really not much going on with those businesses. And that is the primary argument that both schools of thought use against the other one. So, which approach ends up being superior? Well, unfortunately, there's not a clear-cut answer; that's kind of like asking, "How long is a piece of string?"

There are some value investors that do incredibly well and make millions. There are some value investors that really go nowhere. In the same vein, over the past five years or so, there have been some growth investors that have become multi-millionaires, and there are also some growth investors that have gone completely bankrupt.

So, to get a better perspective of these two investing strategies and which one comes out on top, I wanted to rewind the clock and look at the history of the world's best investors and how they have traditionally gone about their investing and how their strategies have changed and improved over time. So if we rewind the clock and look at the original, the OG, the father of value investing, that of course is Benjamin Graham. He wrote the two bibles of value investing back in the day. The first one was "Security Analysis," which was first released in 1934, and then the second was, of course, "The Intelligent Investor," which was released in 1949.

Now, in these books, Graham wrote a lot about valuing businesses and specifically buying businesses that were incredibly cheap. So cheap, in fact, that if you held them, and you literally tore apart those businesses into their individual pieces and sold those individual pieces, you would still come out on top. And Warren Buffett, the world's most successful investor, was actually a student of Benjamin Graham, and thus the Benjamin Graham investing strategy. He started out his investing career also following this strategy.

It was actually Warren Buffett that called this type of investing "cigar butt investing." The main focus of this strategy was the value that you were getting, not so much the business that you are actually investing in. Now, Benjamin Graham worked out that, you know, if you found a lot of these ultra-cheap businesses and you bought a lot of them, you had a diversified portfolio of ultra-cheap businesses, then over a long time, you would come out on top.

It was kind of the idea: the reason it's called the cigar butt approach is that what Benjamin Graham was looking for is lots of cigar butts and hoping that they had just one last puff in them. If one out of every two businesses he found like that just had one puff left in them, over time, he would come out on top as an investor.

Now, Warren Buffett took on this idea of buying ultra-cheap businesses, but it wasn't too long before he started making some quite drastic changes to his own interpretation of this strategy. He began focusing a lot more on the businesses he was buying, as opposed to just looking at the valuation he was able to buy them at. He started focusing on companies with really strong business models, ones that had competitive advantages and competent CEOs.

The reason he started looking at these factors is that businesses that possess these characteristics weren't able to just survive; they were actually able to grow even in tough times. They weren't fighting for survival like the cigar butts; they were actually thriving. And because they were thriving, it meant that their business value was increasing, which meant for Warren Buffett that the value of his investment was also increasing.

Now, this was a fundamental shift in the value investing world because now, no longer was the focus on the cigar butts that had maybe one or two puffs left. For investors, in fact, now the focus was on finding higher quality businesses that were able to grow and thrive over a five to ten-year time horizon. However, one key concept from that Benjamin Graham value investing approach did still endure in this new age value investing approach that Warren Buffett had molded, and that was, of course, the valuation. There was still a big emphasis on valuation.

Warren Buffett's approach, however, was more about finding companies that did have a prosperous future and then focusing on only buying those companies when the market presented them at prices that were discounted to their actual intrinsic value; when Mr. Market had woken up in a depressed mood and was offering these businesses to you cheaply.

In all honesty, Warren Buffett's adaptation of that traditional value investing approach that was put out there by Benjamin Graham is still overarchingly the main investing strategy that the world's best investors of today are using. There still hasn't really been a massive step-change improvement to the strategy since Warren Buffett actually included the ideas of growth investing and value investing together.

Still to this day, investors do best when they find businesses that have a great competitive position and are growing very well over time, but also wait for those infrequent opportunities where the market presents them an opportunity to buy the shares at a discounted price.

Peter Lynch, in his book "One Up on Wall Street," talks about how we should be finding businesses toward the beginning of their S-curve of growth. Phil Town talks about how important it is to find businesses that are growing over time, and the growth rate of the business actually incorporated into his valuation models. Even recently, Monish Pabrai, who very closely follows the investment strategies of Warren Buffett and Charlie Munger, has come out and said that a recent change that he's been making to his investment strategy is to focus more on the long-term compounders, broadening his investment time horizon, and focusing on those businesses that will be able to compound a lot in the future.

These guys are all value investors. If you ask them, they'll say, "Absolutely, I'm a value investor! I would never sink any money into any business until I've run it through some rigorous valuation models." However, it's very interesting to see that actually a prerequisite, before you even get to that valuation, is to make sure that the business actually offers some decent growth into the future.

That seems to be the general trend from the world's best investing minds. It's not about growth investing versus value investing, one or the other; it's about blending the best bits of both worlds. It's about finding companies that do offer fantastic growth into the future but only buying them when the market presents them at a value price, right at a discount price.

Even just as a personal example, last March, at the worst moments of the stock market crash, I personally was buying into Facebook and Google, while everybody else was talking about how they're buying into Royal Caribbean and Carnival Cruises. Now, Facebook and Google only dropped about 30%, whereas these cruise line companies both dropped around about 80%.

So at the time, the cruise line companies were looking like those cigar butt companies, okay? They were the ultra-cheap companies that were attracting a lot of investors. But to me, it was obvious that despite Facebook and Google only being brought down to, say, fair value or slightly undervalued, over the next 10 years, they had a much better opportunity for growth.

Now, yes, you could look at the share prices now of all four of those companies, and in reality, if you bought any four of them, you would have done quite well. However, what's interesting is that is an example of me personally turning down that opportunity of the traditional cigar butt value investing approach instead of opting for the blend of both the growth and value investing approaches.

Overall, I decided to buy the better companies, even though they weren't the cheapest options out there. So overall, guys, that is it for this video. That is the difference between growth investing and value investing, and I hope that I've shown you today that the world's best investors don't get trapped in one camp or the other. They're just out there looking for the best elements to formulate their own investing approach, and I hope you do the same.

I hope you don't, you know, nail yourself down: "I only invest in this," or "I only invest in that," or "I only invest that way." It's all about learning what works, what reliably works, what the world's best investors are doing, and coming up with your own investing approach.

But still, I'd love to hear from you guys! Leave me a comment down below: what do you feel like you subscribe more to? Are you more interested in growth, or are you more interested in value? Not saying that you're purely a growth investor or you're purely a value investor, but on a sliding scale, which way do you tend to tilt? I'd be really interested to hear your thoughts and opinions. Leave that down in the comment section below.

Leave a like on the video if you did enjoy it. Subscribe to the channel if you have not done so already; I would really appreciate it. Now, if you did want to learn how I specifically go through my individual stock selection strategy that has elements of growth investing and value investing, then you can check out Profitful. There is an eight-hour course where it's like no stone left unturned. I go through three valuation models, I go through everything you need to know about understanding the business, competitive advantage, assessing the management team—all that. If you're interested in that, you can check out "Introduction to Stock Analysis." That's the course that you'll be interested in; it's linked down over on my own business, which is Profitful.

And also, if you wanted to pick up that course, you're also financially supporting this channel, so I really appreciate that. It's there if you guys want to check it out. But that is it for today! Thank you very much for making it all the way through to the end of the video. I really appreciate it, and I'll see you guys in the next one.

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