Growth Investing: Betting on the Future?

Abstract

The academic research is incontrovertible. On paper, value investing (at least as defined as investing in low PE and low price to book stocks) beats growth investing. Notwithstanding this finding, growth investing retains its allure with a large subset of investors, drawn by the payoff from investing in the “right’ growth companies. In this paper, we examine different strands of growth investing, ranging from passive screening (investing in small cap companies, initial public offerings or buying growth at a reasonable price (GARP)), to more activist growth investing, which is how we characterize venture capital investing. While growth investing under performs value investing, especially over long time periods, it is also true that there are sub-periods, where growth investing dominates and there is at least some evidence that active growth investors have better luck at beating passive growth investing strategies than active value investors do at beating passive value investing strategies.