Growth and value: two different reasons to buy

Splitting shares into growth and value describes not industries but where the expected return is supposed to come from.

Growth shares

Companies expected to expand revenue and profit quickly. The valuation is high relative to current results — the market is paying for the future.

They are rate-sensitive: the more expensive money is, the less today's value of a profit expected many years out. And they are sensitive to disappointment: a slowdown hits such a share harder than a weak quarter hits a mature company.

Value shares

Companies trading cheaply relative to profit, assets or cash flow. The bet is not on growth but on the market underrating the current state of affairs.

The risk is different: the cheapness may be deserved. A business in structural decline looks cheap on multiples for exactly the reason it keeps getting cheaper.

Why the approaches take turns

In periods of cheap money and optimism growth shares do better. In periods of expensive money and caution, value shares do. The periods are long, and trying to switch between approaches usually means being late in both directions.

Live numbers instead of a textbook example

Gazprom's return on equity right now is 6,17 %, and Magnit's net margin is -0,88 %. Neither number by itself says "growth" or "value": they answer how the company earns today, not what you are betting on. The basis for a purchase is chosen by you, and there should be only one.

What is more practical

Decide what your specific purchase rests on and stay with that basis. Mixing the logics — buying an expensive share "because it is cheap on one metric" — is the most common source of poor decisions.

Related: Price and value: how a market quote differs from what a business is worth and P/E: what it is and why low does not mean cheap.