Growth vs Value Stocks: Now that inflation has peaked, what's the better bet?

The Oracle of Omaha says there are still plenty of opportunities in value investing
Some experts believe this is the decade for value investors
Others believe there is always a place for growth stocks in a portfolio

The much anticipated 2023 Berkshire Hathaway annual shareholder’s meeting wrapped up last Saturday in Nebraska, with more than 30,000 Warren Buffett fans in attendance.

As with previous Berkshire AGMs, the session saw Buffett and Munger cracking jokes and sharing their wisdom from decades of investing.

Here’s a couple of highlights from the Q&A part of the session:

On investing

Buffett was asked about the most important rule for investors.

“You should make sure that you don’t make mistakes that take you out of the game,” he answered.

“You should never have a night when you’re worried about your investment.

“We may make bad investment decisions plenty of times. The key is to try to stay as rational as possible.”

On the future of value investing

Munger said value investors are going to have a harder time now that there are so many competing fund managers, and that will diminish the availability of opportunities.

“My advice to value investors is, get used to making less,” he said.

Buffett, a staunch believer in value investing, contradicted him and said there is still plenty of opportunities for value investors.

“The technology is coming and the world is changing, but that doesn’t take away opportunities,” Buffett said.

“What gives you the opportunities is people doing dumb things.

“In the 58 years we’ve been running Berkshire, I would say there’s been a great increase in the number of people doing dumb things.

“And the reason they do it is because they they can get money from other people so much easier than when we started.

“I think that investing has disappeared so much from this huge capitalistic market, and the big money is now in selling ideas to other people.

“The world is overwhelmingly short term focused.

“If you go to an investor relations call, they’re all only interested in feeding investors’ expectations that will slightly be beaten.

“That’s a world that’s made-to-order for anybody that’s trying to think about what works over five, 10 or 20 years.”

‘A stupendous decade for the value investor’

In simple terms, value investing is a style where investors try to find value in companies that have slower rates of growth.

Because of this flat growth, the actual worth of these companies may not be replicated in its share prices, and hence can be undervalued.

“Price is what you pay, value is what you get” is one of Buffett’s most famous quotes.

“It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price” is another well worn quote.

READ: As the market crumbles, here are 7 areas of well-worn Warren Buffett wisdoms to help you stay afloat

A growth stock on the other hand, is a company that’s expected to grow at a rate faster than the overall market.

They tend to have high P/E ratios, indicating that investors are willing to pay a premium for their growth potential.

Rob Arnott of Research Affiliates says that value stocks typically outperform their growth counterparts by a significant margin in an inflationary regime.

“If inflation over a decade is 4 per cent or higher, value tends to beat growth by 6 to 10 per cent per annum for 10 years,” he told audience at the AFR Alpha Live conference.

“We have opportunities now to invest in value … at a time when inflation risk creates opportunity,” he said. “I think this is going to be a stupendous decade for the value investor.”

Falling rates is good news for growth stocks

Peter Brooke, Head of Quantitative Investments at Platypus Asset Management, said that stocks that do poorly in bad times have higher average returns over long periods than stocks that do better during these bad times – which leads to what’s called a factor ‘premium’.

“One way of thinking about this is that investors want to be compensated for taking on this extra risk,” Brooke told Stockhead.

Brooke also said that value stocks typically have higher near-term cash-flows and lower cash-flow growth, and growth stocks typically have lower near-term cash-flows and higher cash-flow growth.

The value premium should therefore be positively linked to duration, he said.

“To the extent that duration risk drives the value premium, we should expect periods of rising interest rate expectations to be good news for value investors, and falling interest rate expectation to be good news for growth investors.”

Best ASX growth stocks during low rates era

Growth stocks have indeed struggled against value stocks over the last two years, first in the face of the Covid pandemic, and then higher inflation and rates.

But for long term investors, diversification is key and growth stocks will always have a part in their portfolio make-up.

Now that inflation is on a downward trajectory, some wonder whether growth stocks are about to make a comeback.

The years 2017 and 2018 were probably one of the best periods for growth stocks.

In 2018, the RBA cash rate was at 1.50%, versus 3.85% today.

Share prices of small capped growth stocks rose to new heights during in 2018, and these were the best performers on the ASX that year:

TICKER	NAME	PRICE JAN 01, 2018	PRICE DEC 31, 2018	2018 TOTAL RETURN %
BID	BIDENERGY	0.06	1.1	1733
CCX	CITY CHIC COLLECTIVE	0.14	0.98	626
CAG	CAPE RANGE	0.22	1.63	624
MWR	MGM WIRELESS	0.06	0.39	508
PO3	PURIFLOH	0.81	4.35	440
IVX	INVION	0.0039	0.018	356
GLL	GALILEE ENERGY	0.14	0.63	346
BIT	BIOTRON	0.03	0.12	337
GLV	GLOBAL OIL & GAS	0.01	0.05	300
PDN	PALADIN ENERGY	0.05	0.18	283
GLN	GALAN LITHIUM	0.08	0.28	280
PAR	PARADIGM BIOPHARMACEUTICALS	0.27	1.03	275
FOD	FOOD REVOLUTION GROUP	0.04	0.14	272
JMS	JUPITER MINES	0.08	0.25	255
QPR	QUATTRO PLUS REAL ESTATE	0.3	1	233
CVN	CARNARVON PETROLEUM	0.1	0.32	232
MDX	MINDAX	0.005	0.013	225
ACF	ACROW FORMWORK AND CONSTRUCT	0.16	0.51	222
BD1	BARD1 LIFE SCIENCES	0.01	0.02	221
VAN	VANGO MINING	0.05	0.16	191
EXO	ENNOX GROUP	0.0015	0.004	186
TER	TERRACOM	0.24	0.67	179
MCA	MURRAY COD AUSTRALIA	0.07	0.19	164
FTZ	FERTOZ	0.08	0.2	163
AMI	AURELIA METALS	0.26	0.68	157
IGE	INTEGRATED GREEN ENERGY SOLUTIONS	0.13	0.32	156
PPK	PPK GROUP	0.21	0.53	152
NEA	NEARMAP	0.6	1.5	152
RHT	RESONANCE HEALTH	0.02	0.06	150
GSS	GENETIC SIGNATURES	0.32	0.8	146
VRX	VRX SILICA	0.05	0.13	145
IOD	IODM	0.01	0.02	138
TPW	TEMPLE & WEBSTER GROUP	0.44	1	127
ESK	ETHERSTACK	0.09	0.22	126
RMP	RED EMPEROR RESOURCES	0.02	0.05	126
EGY	ENERGY TECHNOLOGIES	0.34	0.76	125
SRH	SAFEROADS HOLDINGS	0.14	0.32	124
TGN	TUNGSTEN MINING NL	0.13	0.28	124
LBL	LASERBOND	0.15	0.32	122
CUV	CLINUVEL PHARMACEUTICALS	8.19	18.1	121
BVS	BRAVURA SOLUTIONS	1.73	3.7	120
TSO	TESORO RESOURCES	0.02	0.04	120
JIN	JUMBO INTERACTIVE	3.5	7.2	117
RSH	RESPIRI	0.04	0.09	116
GAS	STATE GAS	0.36	0.77	114
GLB	GLOBE INTERNATIONAL	1.17	2.3	110
CYP	CYNATA THERAPEUTICS	0.62	1.3	110
IPB	IPB PETROLEUM	0.01	0.02	109
APT	AFTERPAY	5.97	12.4	108
KRR	KING RIVER RESOURCES	0.01	0.03	107

The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.

Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.