Choose your fighter: value vs. growth stocks

It’s probably no surprise that in the market, as in life, there are both big dogs and small fries; the old guard and the young upstarts; the tortoises and the hares. This divide is seen most clearly in the rivalry between value and growth stocks, as well as the investors who favor one or the other.

Value stocks generally belong to companies that are bigger, older, and more established. They’re often considered more trustworthy, but may also be seen as outdated and slow to adapt. They don’t offer quick returns and tend to be undervalued as a result.

Growth stocks, by contrast, belong to newer companies that are making a splash, pushing their industries forward and opening new opportunities. As their name suggests, they can grow a lot over a relatively short period – but they can also lose a lot just as quickly.

In other words, growth stocks offer potentially big returns over a relatively short period, but that opportunity comes with some significant risks. Value stocks, meanwhile, don’t tend to pay off quickly – but their longevity and consistency can still turn a profit in the long term.

That’s the theory, anyway.

Growth stocks have run ahead of value stocks for over a decade

But as you can see in the chart above, growth stocks have had the jump on value stocks for over a decade now, at least broadly speaking. This is largely due to the meteoric rise of tech companies and low interest rates in that time, which doesn’t appear to be slowing down.

So one has to wonder: is value investing dead? Should we all say goodbye to Berkshire Hathaway and start snapping up Tesla and FAANG shares as fast as we can?

Well… like many things in the world of finance, it’s not quite that simple.

Regardless of which stocks or indices have been pulling ahead recently (and yeah, even a decade is relatively recent), the enduring truth of investing is that the most reliable wins come from a diverse portfolio that is allowed to grow over time.

In other words: value and growth stocks are best seen as complementary, rather than opposed, and it pays to have a bit of both.

– Graham