The Little Book of Sideways Markets: How to Make Money in Markets that Go Nowhere

Chapter 7. Brought To You By The Letter "G" (For Growth)

	Growth and value investing are joined at the hip.
	--Warren Buffett

The stock market is not a guy you'd want to take home to meet your parents. Though he is passionate, and he might even promise to love you to eternity, his love could turn into indifference or hate in a New York minute.

As investors we want to capitalize on the stock market's unstable temperament and thus buy out-of-favor, high-quality stocks that are trading at attractive valuations when others dump them. Though the stock market will often circle back to the stock a while later and start singing love songs again, it is hard to know when his heart will change; it could take some time.

The strategy of buying out-of-favor stocks comes with the risk that a supposedly temporary breakup will turn into a longer separation and the stock becomes dead money—staying undervalued and not going anywhere for a long time. This is where growth comes in handy. A company that is growing earnings and paying a dividend is compensating for the wait, substantially reducing the dead-money risk.

Usually when investors talk about growth they mean earnings growth. Myopically they ignore dividends—a mistake we won't make. The growth dimension encompasses both growth of profitability (expressed as earnings or cash-flow growth) and dividends (expressed as dividend yield). When a company pays a high dividend, you are getting paid to wait for the stock to come back to appropriate valuation. ...