"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 gets lost, even here at The Fool.
Head to head
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 it nearly impossible to produce meaningful returns. More often, gurus like Peter Doyle and Murray Stahl of Kinetics Paradigm invest in companies 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 values, or stocks that the market has unfairly undervalued. Often, these companies are experiencing problems that 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
History proves that you'll need more than math to discern what, exactly, is mispriced. Take the market's 10 best stocks. Hansen Natural was trading for 29 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, an 87-bagger, which was trading for 21 times earnings a decade ago. Celgene (NASDAQ:CELG), a 61-bagger, hadn't produced a penny of profit in its history.
The very best value stocks
Stock market myth says that only value investors zig as others zag. Hogwash. Doyle and Stahl have been buying shares of Reliant Energy (NYSE:RRI), Allegheny Energy (NYSE:AYE), and CME Group (NYSE:CME), none of which look "cheap" by the numbers. Yet Kinetics Paradigm, by investing where others won't, is a solid market-beater.
David Gardner can claim similar success. When last summer obliterated the returns of his Motley Fool Rule Breakers service, David remained committed to owning businesses whose capacity to rule high-growth industries leads to huge gains in cash flow.
Today, more than 10 stocks in the Rule Breakers portfolio have at least doubled, including China's top search engine, Baidu.com (NASDAQ:BIDU). No surprises there. It was misunderstood. It was cheap relative to its growth potential. In short: It was a value stock.
Rules breaking, fortunes in the making
So, please, 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.
This article was originally published on Jan. 31, 2007. It has been updated.
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Fool contributor Tim Beyers is a sucker for growth stocks and a regular contributor to Rule Breakers. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Baidu.com is a Rule Breakers recommendation. The Motley Fool's disclosure policy is a rebel on Wall Street.
