Friday, August 15, 2014

Growth versus Value - a simple difference?

For a long time, “value investing” and “growth investing” were mistakenly viewed as separate and incompatible styles of investing. Legendary investor Warren Buffett debunked this myth when he said, “Growth and value investing are joined at the hip. Value is the discounted present value of an investment’s future cash flow; growth is simply a calculation used to determine value.”  from AAII.com

The passage is a nice way to focus on an age old question for any equity investor. Growth versus value is always looking at different parts of the same equation. What is the form of discounting which is in the denominator and what is the forecast of cash flows which is the numerator? What is the assumption of earnings today versus earnings tomorrow and what are the risks associated with those future earnings?

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