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  • Writer's pictureIshfaaq Peerally

The Problem with Growth Stocks

In recent years, there has been a misconception that growth investing is better than value investing. You look at the returns of Cathie Wood $ARKK for example, compared to Warren Buffett $BRK.B , you will see that growth investing is outperforming. Actually, value investing is underperforming the market $SPX500 . What exactly is Growth Investing? Why is may not be good for the long term?

Value investing is about buying stocks trading under their intrinsic value. Growth investing is buying stocks based on their growth potential, rather than their intrinsic fundamental value. A growth investor is likely to believe that the market is efficient and may use technical analysis, historical valuations, sector valuations instead of focusing on the fundamentals and numbers of the business.

What's wrong with being a growth investor? In the late 1990s, investors were investing in growth stocks $NSDQ100 without looking at fundamentals. For example, investors invested in Microsoft $MSFT even when it had a PE ratio of 80. The stock crashed during the dotcom bubble burst and they had to wait 16 years to breakeven even though the company kept growing.

Over the long-term, value still beats growth.

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