Do You Make Dangerous Predictions?

There's an old debate that still flares up among investors: "What's the best way to beat the market -- growth or value?" Both camps have die-hard adherents who think their way is the absolute best, and that all others are doomed. When you sit back and look at it, though, they've got a lot more in common than either side would like to believe.

For instance, both sides agree that companies are valued based on their future prospects. And everyone agrees that the past matters more as a baseline than as a hard-and-fast predictor of what's to come. Analytical minds in both camps rely on discounted cash flow techniques to determine what they're willing to pay to buy a company. To top off the similarities, no smaller value investing luminary than Warren Buffett himself has been quoted as saying, "Growth and value investing are joined at the hip."

So, what's the difference?
With so much in common, you'd figure growth and value investors would largely agree on what companies are really worth. Yet if you look at the portfolios of value and growth investors, they rarely concur on which companies are worth owning today. Looking at the top five last reported holdings of the value-focused JennisonValue (PBEAX) fund, for instance, reveals the following firms:

On the flip side, these companies held the top spots in the growth-focused Transamerica Premier Equity (TEQUX) fund when it last reported its holdings:

It should jump out at you immediately that the yield on the companies in the value fund tends to be more than twice the yield of the companies in the growth fund. On the flip side, the P/E ratio of the companies in the growth fund is more than twice the P/E ratio of the companies in the value one. Yet in spite of their radically different holdings, both funds have remarkably similar performances over the past couple of years, easily besting the S&P 500.

Those key company characteristics of the funds, however, underscore the major difference between successful value and successful growth investors. While the growth investor asks, "What is your potential for greatness in the future?," the value investor asks, "What are you doing for me right now to be worth my money?"

Why value wins
While both strategies have the potential to outperform the market if practiced right, the value strategy that we follow at Motley Fool Inside Value has an edge: Nobody knows the future until it happens. By that point, it's the past, and there's a new future that determines what any given company should be worth.

The farther out into the future you project, then, the less certain your predictions become. If you can justify a company's value based on what it's worth today, your argument's much stronger than one based on what might happen a few happen years from now. In other words, when you go looking for growth stocks, a lot more can go wrong.

If you've been burned by buying companies that have simply not lived up to their potential, you understand the importance of investing based on actual, delivered results. By joining us at Inside Value, you will see just how we use our laser-like focus on financial results to try to routinely crush the market.

Not quite sure where you stand in the value vs. growth camp? Click here to try a 30-day free trial of Inside Value to see whether our grounded-in-reality style fits your investing personality.

At the time of publication, Fool contributor and Inside Value team member Chuck Saletta owned shares of Bank of America and his wife owned shares of Kroger. Bank of America is an Income Investor recommendation. The Fool has a disclosure policy.