Ask two investors to define growth and value and you will get three answers. Strip away the tribalism and the distinction is simple: value investors buy businesses trading below what they are worth today; growth investors buy businesses whose worth is expected to expand.

The value approach

Value investing looks for a gap between price and intrinsic worth. Typical value stocks show low P/E and price-to-book ratios, often pay dividends, and usually operate in unglamorous industries — banks, energy, industrials. The bet is on reversion: the market has been too pessimistic, and sentiment will correct.

The growth approach

Growth investing accepts a high price today in exchange for a much larger business tomorrow. Growth stocks typically reinvest everything instead of paying dividends and trade at multiples that look absurd on current earnings. The bet is on compounding: revenue and profit expanding fast enough for the valuation to grow into itself.

Why the argument never ends

Both styles work, and they take turns. Value tends to do relatively better when interest rates rise, because a company's distant future profits are discounted more harshly when money has a cost. Growth tends to do relatively better when rates are low and capital is cheap. Investors who declare one style permanently superior are usually extrapolating from whichever regime they happen to have lived through.

Growth and value are joined at the hip. Growth is always a component in the calculation of value. — Warren Buffett has made this point repeatedly; a business's future growth is part of what it is worth today.

What this means for you

  • If you own a broad index fund, you already own both, weighted by market size. That is a legitimate answer, not a cop-out.
  • Tilting toward one style is a deliberate bet that it will outperform. Be honest that it is a bet.
  • Whichever you pick, the failure mode is the same: abandoning it after two bad years, right before it works.

Summary

The labels describe where you expect your return to come from — a re-rating, or genuine business expansion. Most investors are best served owning the whole market and letting the styles fight it out inside the fund.