“Value” doesn’t grow OR has “Growth” no value?

Categorizing stocks into “value” and “growth” styles seems to me as the biggest travesty of investment thinking. Had low P/E, P/B stocks been statutorily defined as “value”, life would have been easy, but unfortunately, “value” signifies a much broader concept of buying stocks that are trading at a price below their intrinsic worth, a fairly forward-looking concept where the worth of a company’s assets is evaluated by discounting their anticipated cash flows in future. A process very similar to pricing a bond. But such a broad interpretation of “value” would have necessitated classifying every stock as a “value” stock, unless rejected after a thorough investigation of the stock’s price and value. This certainly would have put academia and fund-of-fund/macro-fund managers in deep trouble and therefore to bail them out, indices were bifurcated into “growth and “value” styles, based on simple but flawed logic.

Let’s consider the other side of the equation, the “growth” style. If “growth” is not “value”, then by the very definition (the restricted one) of “value”, “growth” style would imply buying stocks with high multiples (P/E, P/B). Therefore anyone who invests in stocks of growing industries/company or companies having higher earning multiples ought to be touted as momentum player or follower of “bigger fool theory” as they seems to have little or no regard for value.

Let us consider what Benjamin Graham, the legendary investor (many prefer calling him father of value investing) has to say on “growth” stocks; “The growth-stock approach may supply as dependable a margin of safety as is found in the ordinary investment – provided the calculation of the future is conservatively made, and provided it shows a satisfactory margin in relation to the price paid.”

“Activist” and “Distressed” form of investing, typically considered as “value” bastions, involves buying large positions in stocks of poorly managed/possible turnaround companies with the purpose of unlocking value either through forcing change or restructuring efforts. But the target company typically trades at very weird multiples, either too high or low and at times negative. Does these high multiples then suggest that they should not be considered as “value” investments.

It would certainly be hard to come across a value investor who would have picked a company without the prospect of its earnings growing. And imagine a “growth” investor who buys stocks at high P/Es without any value proposition. I think the “value-growth” at the best, serves the academia as now they can write papers on subjects other than MPT and asset pricing.