value investing and time

The rhythms of growth and value investing are different.

In a somewhat too simple sense, growth investors have greater certainty about when market-moving information will reach the public–during the next quarterly earnings announcement–than about what that information will be. Growth investors believe, sometimes with great conviction, that earnings for XYZ will be up at least 20%, buy maybe a lot more (vs. consensus expectations of, say, 12%), but they know for sure when the actuals will be announced.

On the other hand, value investors (good ones, at least) have a firm conviction, buttressed by careful analysis of company and industry fundamentals, that a firm whose stock they hold is deeply undervalued by the market. That undervaluation is based on the company’s rich collection of assets, on which it is currently earning only a paltry return. They think this hundred dollar bill lying on the sidewalk will ultimately be picked up and put to use. They know what will happen, but they have no idea when.

Three consequences:

–value investors have a different mindset, and a much longer investment time horizon, than growth investors

–value portfolios tend to have maybe twice the number of positions as their growth counterparts, to give a greater chance that something will perform in a given year

–value investors tend to fall into two camps: dyed-in-the-wool asset value enthusiasts and value with a catalyst investors. Both use the value methodology but the latter want to see some impetus for positive change in a company before buying. They understand they’ll miss the absolute bottom, but they have greater certainty that they won’t be tossed to the curb before their ideas bear fruit.

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