The ‘value’ of ‘growth’
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In short, it’s a phony war because they can’t be separated from each other, and, at the extremes, becomes a vain argument over identity and, as such, a waste of time.
What do I really think? I’m glad you asked…
That doesn’t mean there aren’t some great investors the market chooses to call ‘value investors’ (they may even use the label themselves). And the same for the great ‘growth investors’.
Which is kinda the point. If both can and do flourish, doesn’t that just prove that it doesn’t need to be an ‘either/or’ game?
I also mentioned that, rather than either label, my investing tends to (roughly) centre around the concept of ‘quality’.
I have my share of losing investments.
But among my winners are long term ‘growth’ stories like Corporate Travel Management Ltd (ASX: CTD) (I still own shares), and ‘value’ stories like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) (I still own them, too).
But, truth be told, while CTM had a lot of growth ahead of it when bought it, I paid what I thought was a defensible price, based on the value I saw in its shares.
And while Soul Patts is considered by some to be about as boring as it gets, according to the most recent figures it published, the company had beaten the market over the 1, 3, 5, 10 and 15 years. Not bad for a stodgy, boring value stock huh?
Now, you’re not going to get me to wave either the value or the growth flag here.
But I am going to speak for both, applied properly.
See, I thought CTM was great value, because of the potential growth I thought it could achieve via organic customer growth and some choosy and well-priced acquisitions.
Yep, value because of growth. It’ll blow some minds, but I thought it was true (and thus far, I’ve been roughly right).
And while Soul Patts is run by people often considered ‘conservative’, it’s more than a century old, and the company name couldn’t be more boring, some of its most important assets have grown very nicely. Companies like TPG Telecom Ltd (ASX: TPG), brickmaker Brickworks Limited (ASX: BKW) and in-house managed assets like a property fund and equity portfolio.
No, I’m not saying ‘everything is okay, depending on how you look at it’
I’m saying that it’s hard to make money as a value investor without growth.
And it’s hard to be a successful growth investor if you overpay for everything.
I do want to speak, though, to the value of growth (no juxtaposition intended) in an investment portfolio.
See, the investing equation runs something like this:
Your return equals:
— The percentage of the time you’re ‘right’ times the average gain when you’re right
— The percentage of the time you’re ‘wrong’ times the average loss when you’re wrong
Now, if you’re a hardcore venture capital investor you might be super high-risk: losing almost everything 9 times out of 10, but make 100 times your money when you’re right.
If you’re a hardcore deep value investor, your average gain when you’re right might be 30-40%, meaning you can’t afford to be wrong too often — one wipeout might cancel most or all of your gains.
Most of us, of course, are somewhere in between.
Professionally, my strike rate is around 6 times out of 10.
So that’s better than even.
Plus, my average gain tends to be large than my average loss.
Going back to our equation above, that should deliver — as it has, so far — market-beating results.
But here’s why I like to (mostly) but companies with growth potential.
If I was buying $1 for 70c (the deep value formula), once the market realised my dollar was worth a dollar, the gap would close, and my investment thesis would be over.
Oh, don’t get me wrong: it would have been a profitable investment, and I’d be happy… but I’d still have to close it out, rebait my hook, and cast again.
Nothing wrong with that. At all.
But, to torture my fishing analogy, what if I could hook the fish but leave it in the water to keep growing?
What if that $1 I bought for 70c could grow to actually be worth $1.30.
I know I have the fish.
It’s on the hook.
I don’t have to rebait. Or recast.
Okay, enough of the fishing (for now, at least).
The ‘fish’ in this latter case is, of course, a growing company.
It’s Woolworths Group Ltd (ASX: WOW), bought at $3.
Commonwealth Bank of Australia (ASX: CBA), purchased at $10.
BHP Group Ltd (ASX: BHP), at $5.
I wouldn’t buy any of those companies, today, for growth.
But at the right point in history, in the right circumstances, at the right price?
Compare that with Telstra Corporation Ltd (ASX: TLS) (whose shares I also own).
It has been a very long time since that company delivered any meaningful growth.
Maybe you could have bought it a little cheaper. And sold it a little dearer.
But compare that with the ten-bagger (ten-fold) returns from those other three companies.
Making money on Telstra was hard work. Bloody hard.
It was recognising they were quality businesses, with growth ahead of them, then buying.
That last bit is important.
Not only do you minimise the chance of error in my mind (buying and selling over and over again means you’re making more decisions, each of which you have to get right), but you get the compounding power of quality.
So, while I don’t choose to put myself in the (partisan and usually unhelpful) bucket of either value or growth, it is important to highlight that I do look for companies with strong growth potential (and preferably a strong track record of growth, too).
Because, if you get it right, the compound returns can be astronomical.
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Motley Fool contributor Scott Phillips owns shares of Corporate Travel Management Limited, Telstra Corporation Limited, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Brickworks, Corporate Travel Management Limited, Telstra Corporation Limited, and Washington H. Soul Pattinson and Company Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.