When it comes to building wealth in the stock market, two key investing philosophies have stood the test of time: growth investing and value investing.
Both have produced legendary returns and equally legendary investors, from Cathie Wood’s bets on disruptive innovations to Warren Buffett’s steady hand in buying great companies at bargain prices.
History shows that each strategy shines under different market conditions. Growth stocks can deliver significant upside during bull markets, while value stocks often hold up better when the economy slows. Knowing which style is better for you depends on your risk tolerance, time horizon and conviction in the strategy you choose.
This breakdown compares the philosophies, performance and mechanics of each approach.
- Growth Investing
- Value Investing
- Growth vs. Value Investing
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Growth Investing
Growth investing targets companies that are expected to expand earnings and revenue faster than the overall market. Growth stocks often forgo dividends to reinvest in innovation. They’re generally concentrated in sectors like technology, biotech and clean energy.
Growth investors are willing to pay a premium for a stock because they believe its future growth will justify a high valuation. They are less concerned with a company’s current profitability and more focused on its potential.
A growth investing strategy thrives on innovation and disruption. A company like Tesla is a great example. For years, its high stock price was not based on current profits but on the market’s belief in its future dominance in electric vehicles and clean energy. Investors who bought Tesla stock five years ago would now see a return of 188%.
Pros: Potential for substantial capital appreciation often leads to outperformance during strong bull markets.
Cons: High volatility and greater risk of large losses if the growth story falters. Valuations can be sensitive to economic shifts and interest rate changes.
Value Investing
Value investing follows the principle of buying assets for less than they’re worth. The philosophy, popularized by Benjamin Graham and Warren Buffett, involves analyzing a company’s financial statements to find stocks that the market has undervalued.
These are often established companies in mature industries with consistent earnings and strong balance sheets. Value investors want a margin of safety when buying stocks and a price significantly below their intrinsic value.
Value investors use fundamental analysis to scrutinize metrics like the price-to-earnings (P/E) ratio, price-to-book (P/B) ratio and dividend yield to find discrepancies between a company's market price and its true worth. They believe that, over time, the market will correct the mispricing.
The ideal value stock is profitable, has a history of paying dividends and is trading at a discount. Berkshire Hathaway, under Buffett’s leadership, has embodied this strategy by acquiring undervalued companies or taking significant stakes in them. Investors who bought Berkshire’s B class shares five years ago would now see a return of 125%.
Pros: Lower volatility and risk profile, potential for steady income through dividends and a greater margin of safety during market downturns.
Cons: They can suffer from value traps, which are stocks that appear cheap but have fundamental problems. They can also underperform during strong bull markets and require significant research.
Growth vs. Value Investing
| Growth Investing | Value Investing | |
| Philosophy | Invest in companies with above-average growth potential | Invest in companies with strong fundamentals trading below intrinsic value |
| Selection Criteria | High revenue/earnings growth, high P/E ratios, often reinvest profits | Low P/E ratios, consistent dividends, strong cash flows |
| Historical Performance | Often outperforms in bull markets but more volatile | Historically outperforms in bear markets and during economic uncertainty |
| Risk Profile | High: subject to large drawdowns if growth slows | Moderate: safer but vulnerable to value traps |
Investment Strategy
Once you’ve decided whether growth or value investing aligns best with your goals, it’s time to put your strategy into action. Both approaches can be executed through selecting individual stocks, professionally managed funds or a mix of both.
ETFs and Mutual Funds
For Growth Investors: If you want exposure to fast-growing companies without hand-picking each stock, growth exchange-traded funds (ETFs) are a good option:
- Vanguard Growth ETF (VUG): Tracks the CRSP US Large Cap Growth Index, which offers exposure to companies with high earnings growth potential, including many in the tech and consumer discretionary sectors.
- iShares Russell 1000 Growth ETF (IWF): Mirrors the Russell 1000 Growth Index, emphasizing large- and mid-cap companies with above-average growth characteristics.
For Value Investors: Value ETFs focus on companies with low valuations relative to fundamentals, often in mature industries:
- Vanguard Value ETF (VTV): Tracks the CRSP US Large Cap Value Index, holding stocks with strong balance sheets and steady cash flows.
- iShares Russell 1000 Value ETF (IWD): Mirrors the Russell 1000 Value Index, offering a diversified basket of U.S. companies considered undervalued based on P/E and P/B ratios.
Mutual funds such as the T. Rowe Price Growth Stock Fund (PRGFX) for growth or the Dodge & Cox Stock Fund (DODGX) for value can also be good fits for investors who prefer active management over passive index tracking.
Brokers and Stock Screeners
Whether you invest directly in individual stocks or use ETFs, modern brokerages provide tools to help identify candidates that fit your style:
Fidelity, Charles Schwab and TD Ameritrade all offer advanced screeners that allow you to filter by metrics, such as:
- Growth Criteria: High revenue growth, high EPS growth, forward P/E ratios above market average, high P/E ratios, low or no dividend yields.
- Value Criteria: Undervalued companies priced lower than the broader market, low P/E ratios, high dividend yield, low debt-to-equity ratio.
Frequently Asked Questions
What is the primary difference between growth and value investing?
Growth investing focuses on companies with high growth potential, even if they have high valuations. Value investing looks for established, undervalued companies with strong fundamentals.
Can you blend growth and value stocks?
Yes. Many successful investors blend both strategies to build a diversified portfolio. They try to find companies with strong growth prospects that aren’t overpriced, which can help mitigate the risks of growth investing while still capturing a company’s upside potential.
Are growth stocks or value stocks better long-term?
Academic research, such as the Fama-French Three-factor model, suggests that historically, value stocks have outperformed growth stocks over the long run. But growth stocks have dominated in recent decades. The better strategy depends on the economic cycle and time frame you’re using.
