Growth vs Value Investing

Growth investing buys companies whose earnings are expanding faster than the market - higher valuations, smaller or no dividends, technology-heavy. Value investing buys companies priced below a measure of their worth - lower price-to-earnings ratios, established businesses, dividends. The two styles are the oldest split in investing, and on the ASX the split maps roughly onto technology names on one side and banks and miners on the other.

The styles rotate in cycles that are real and unpredictable. Growth dominated the 2010s as rates fell; value outperformed through 2021 to 2023 as they rose - a reversal nobody called in advance. The backtests that prove each style right are the part the marketing quotes: every style's decade exists, and the rotation between them is the risk. The price-to-earnings ratio entry covers the valuation arithmetic both styles run on.

Walk the growth side. The company earns $1.00 of earnings per share and trades at $40 - a P/E of 40, pricing expansion. Earnings compound at 25 percent a year for four years to roughly $2.44; if the valuation compresses to a P/E of 20, the share trades at roughly $49 - a 22 percent return despite the valuation halving. The earnings did the work, which is the growth thesis: pay up for the compounder and let the earnings outrun the multiple.

The value side runs the arithmetic backwards. The bank earns $3.60 of earnings per share and trades at $40 - a P/E of 11 - and pays a $2.40 dividend, roughly a 5.5 percent cash yield fully franked. The thesis is the price: buy below intrinsic worth, collect the dividend, and wait for the valuation to normalise. The dividend yield entry covers the income leg, and the price-to-earnings ratio entry covers the valuation.

The rotation is the third mechanism, and the unpredictable one. Cheap money powered growth's decade in the 2010s; rising rates repriced long-duration earnings and value outperformed through 2021 to 2023. The ASX adds a structural twist: the local index is weighted to banks and miners, so an ASX growth investor is usually buying global exposure, and the index fund entry - which holds both styles in index weights - is the option that skips the rotation call entirely.

For an Australian reader, the choice shows up in every product screen: the growth option versus the value-tilted one, the tech ETF versus the bank-heavy dividend portfolio. The honest answer is that the rotation is real and the cycles run for years. The calls are made reliably wrong at the extremes: growth looked permanent in 2021 and value looked dead, and both reversed within two years. The index fund entry holds both styles at index weights, which is the option that skips the call.

A colleague named Brent (yes, that Brent) moved his portfolio to value in early 2021 because growth had 'run out of road'. He moved back to growth in 2023 because value had 'clearly won'. He paid for both rotations in the years each style underperformed, and the whipsaw cost more than either single decision. The highest-leverage thing most Australians can do is pick a style you can hold through its losing years, or hold the index, which owns both. Run the asset allocation calculator on the split before the next rotation.