Growth Vs. Value: How to Profit from Both

Growth and value periodically take turns claiming out-performance. Many investors agonize over which style to follow; jumping from one to the other based on the latest performance numbers. For those who can't make up their mind, there is GARP (Growth At a Reasonable Price) or mutual funds that seek "undervalued" growth stocks. Both are equally dangerous.

There is no need to agonize or combine. Growth and value cannot outperform simultaneously. There are simply times when one style does better than the other. You can profit from both if you understand the market dynamics.

The business cycle
Growth works best in a healthy economy, when new innovative companies bring new products and services to the market. At the same time, excessive enthusiasm makes stocks overvalued and good value hard to come by. Growth outperforms value.

When the economy sputters, stocks go into a tailspin. Selling drives stock prices to ridiculously low levels. At the same time, it's hard to grow in an economy where people reduce their purchases to bare necessities. Growth sputters, value shines.

As the economy improves, stock valuations return to normal. Value dries up, growth resumes. The cycle is complete.

Money always seeks the highest return with the least relative risk. At times of panic, there is no need to risk capital on new unproven enterprises when existing businesses can be purchased for pennies on the dollar. (In 2008 - 2009 Ford was selling under $2.00. Most recent high: $14.00.) As value deals dry up, better returns are once again sought in new ventures.

So, no need to debate which is better, growth or value. All you need to do is follow the economic cycle.

The numbers game
Going by performance numbers is dangerous because they reflect past performance, and "past performance does not guarantee future results." When growth sputters, its immediately preceding numbers look spectacular, but if you buy based on them, you will be buying past performance right before a steep decline. Value shines at the beginning of a recovery, when bargains abound, but the immediately preceding numbers look bleak compared to the growth. If you wait to see value numbers improve before buying, you will be too late, as the value will have been realized and growth returns.

GARP and other pitfalls
Trying to find bargains among growth stocks won't get you far either. You can't outsmart the market. It ALWAYS puts a premium on growth. If a growth stock is cheap, it's for a reason, usually a nasty one. You will either get a lemon, or get hurt.