Value Investors and Growth Companies

We love value investing and its been a successful strategy to invest and make money. You ask most of the long term investors and they would preach you this style of investing.

Why value investors do not own growth companies?

Value investors are risk averse individuals. There first step in analysis would be to evaluate how can they minimize the risk any downside to their investment. They love to identify mis-priced scenarios rather than bet on some new hot promise that can transform the world. Hence you don't find the value investing gurus taking any stake in the new growth companies until they are proven.

Why do value investors miss many hot opportunities to invest?

You need to understand 3 Stages to Bull Market (as told by Howard marks) -

1. First Stage - Very few understand there could be an improvement that can take place in a given sector or business

2. Second Stage - When most people accept the improvement is actually taking place and the sector is evolving.

3. Third Stage - When everybody believes that things can go better forever.

Revolutionary Change(Growth Companies Objective):

All the new revolutionary changes in the world could be from

• A new start up

  • As a value investor New start ups are a BIG NO

• A company thats changing the direction of business

  • As a value investor companies changing direction of business is a red flag

• Building a new product that might totally change the current behavior.

  • As a value investor hoping a new product would change consumer behavior is not really exciting

So value investors are usually on the sidelines of any new change. They are not interested in getting in on the second or third stage of investing. They always prefer to pay less for the business they own and also like to have a fair understanding of the track record of the management and cashflow of the business.They like to invest in stocks where they have clear path to success.

Example of value investing:

Li Lu a trusted money manager who handles Charlie Munger capital via Himalaya Capital is known for following value investing strategy. He is a great investor and is not known for giving speeches in public very often, but the ones where he shared his knowledge are extremely valuable. He doesn't invest in stocks if the margin of safety isn't large as per his calculation of the business.

I have been following him for over couple of years and have not seen him invest in US pre-covid times.But what got me interested was he started investing in late 2019 and entire 2020 in a semiconductor company called Micron(Ticker MU) @ $40 to $50. It wasn't clear as to why was he heavily investing in MU at that time, but now its very clear that there is a semiconductor supply shortage in 2021 due to the shutdown across the world and the raising demand of electrification.

Micron stock chart - It was running sideways from 2017. But Li Lu started investing in end of 2019 and entire 2020.

Entire US market was down in March of 2021, there were drops of over 50% in some of the big quality companies but Li Lu deployed majority of his investment on MU. Reason being his downside was minimal and expected upside was tremendous. Now, in his case he got in at the First Stage. The stock is already doubled and if the shortage continues we might reach stage 3:)

This is a company that might be moving from value to growth as the valuation multiple has increased because of the supply demand issue and might turn out handsome for him. I wouldn't categorize this investment as being in forefront of change; would rather call it as being smart in identifying the gap. He got in very early and can now enjoy the ride of exuberance as he already is 100% up.

Such gaps would be a typical way how the value investors make money. They are happy to sit on the sidelines with piles of cash to wait for the right opportunity. Hence I dont think in most cases value investors will be willing to bet on a IPO or some future promise without concrete confirmation of delivery.

Growth Investors are usually at the forefront of change -

On the other hand, growth investing would a term that would be thrown around some start ups, speculative bets or promises.These are the companies that are trying to promote change by exploring a new sector or bringing technology to an already established sector or expanding their business really fast. This are high risk reward opportunities. Nothing wrong with the concept or this style of investing method. You just need to understand the risks associated with growth investing is extremely high as the margin of error is very slim. Moving from stage 1 to stage 3 can happen very quickly in this type of investing. Just be aware that everything should fall in place for you to multiply your investments and risk of capital loss is high too.

Your risk taking capability determines your style of investing - whether it's growth or value.

Disclaimer: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.This is not meant as a investment advice. Please do you own investment research and follow approach that suits you best. Good luck!

Additional Disclosure: I dont own any share of MU at the time of publishing this article.