Value Investing: Tools and Techniques for Intelligent Investment

Chapter 10. Tears before Bedtime^[10]

Whenever I write about value vs growth, I tend to classify growth as the polar opposite to value stocks. The growth managers always cry that this is an unfair definition. So in an effort to be even-handed, this chapter examines the evidence on growth investing without reference to valuation metrics. However, the results don't change. Growth investing is still likely to end in tears before bedtime.

• We all have a habit of looking for information that agrees with us. So to try to confound this bias, we should seek out the information that would show we are wrong. Over the years, I have produced a number of papers showing that various measures of value tend to outperform. Whenever I do this work I tend to end up defining growth as the polar opposite of value stocks in terms of valuation. However, this may not be an altogether accurate definition of growth stocks.

• So how should we define growth? Perhaps the many books written on great companies might offer some suggestions. In Built to Last, Collins and Porras define 18 'visionary' firms – the crème de la crème of the corporate world. They also define a group of comparator companies (good companies in the same industries as the 'visionary' ones). Unfortunately, since the book was published the comparator companies have significantly outperformed the visionary firms!

• Perhaps, the Fortune survey of most admired companies will provide a better insight. Anginer et al. have recently tested portfolios of the ...