"Growth and value investing are joined at the hip."
You think that's crazy? Tell Warren Buffett. He's the one who said it, not me.
But of course, I think he's right. I'm writing today because the largely semantic differences between value and growth often get lost, even here at The Fool.
Head to head
That's because there is a temptation to equate growth investing with speculation, as fellow Fool Chuck Saletta did here.
But that's just wrong. Real growth investors don't bet on companies whose "sky-high" expectations make generating meaningful returns difficult at best. More often, gurus like Harry Lange of Fidelity Magellan or John Laporte of T. Rowe Price New Horizons invest in firms whose superior growth characteristics have yet to be recognized or rewarded by the stock market.
Value investors, on the other hand, look for stocks that trade for less than their intrinsic value, or stocks that the market has unfairly undervalued. Often, these firms are experiencing problems which investors believe to be temporary.
Both strategies, although seemingly different on the surface, operate on the premise that the market has mispriced a stock.
The obvious won't help you
Of course, you'll need more than math to discern what, exactly, is mispriced. Take the market's 10 best stocks. American Eagle Outfitters (Nasdaq: AEOS ) was trading for 28 times trailing earnings 10 years ago. A value investor simply looking for stocks with P/Es below the market average would have missed the 78-bagger to come.
Same with Chico's (NYSE: CHS ) , an 87-bagger, which was trading for 21 times earnings a decade ago. Best Buy (NYSE: BBY ) ), a 40-bagger, suffered from low sales growth and negative earnings in 1997.
The very best value stocks
Stock market myth says that only value investors zig as others zag. Hogwash. Some of the best growth investors around, including Lange, have been buying shares of Whole Foods (Nasdaq: WFMI ) -- the premium grocer whose stock still commands a premium multiple. Other "expensive" stocks on his list include disk drive maker Seagate Technology (NYSE: STX ) and pharmaceutical specialist Allergan (NYSE: AGN ) .
Yet Lange, formerly the head of Fidelity Capital Appreciation, obliterated the return of the S&P 500 for a half-decade before taking the helm at Magellan. How? By going beyond the numbers.
Fool co-founder David Gardner can claim similar success. His best picks are the result of studying businesses whose capacity to rule high-growth industries leads to huge gains in cash flow. That's why Akamai Technologies (Nasdaq: AKAM ) is a four-bagger for Rule Breakers subscribers. It was misunderstood. It was cheap relative to its growth potential. In short: It was a value stock.
Rules breaking, fortunes in the making
Don't make the mistake of confusing growth investing with speculation. You'll miss out on just about all of the market's best value stocks -- the misunderstood multibaggers in the making -- if you do.
Click here now if you'd like to join us at Rule Breakers in our quest to find the market's next 10 best stocks. Your pass is free for 30 days and there's no obligation to subscribe.
This article was originally published on Jan. 31, 2007. It has been updated.
Fool contributor Tim Beyers owns shares of Akamai and Seagate. American Eagle, Best Buy, and Whole Foods are Stock Advisor picks. T. Rowe Price New Horizons is a Champion Funds recommendation. The Motley Fool's disclosure policy is a rebel on Wall Street.