Investment textbooks taught us all about valuation and then a box from the 1980s was delivered and subsequently skewed all that learnedness into another direction. That new direction was to put valuation on a continuum — as it always is/was — and named the edges of the continuum value and growth. The box was meant to be educational and clarifying; it was but it also perverted the art of investing into thinking that value and growth were distinct things. They are not. It's time that we unpack that box.
Valuation is done based upon estimating the value of assets owned and adding the estimated future earnings in today's dollars. We could argue that estimating the value of assets owned is easier than estimating the unknown future of a company's earnings. And, estimating future earnings — always difficult — is even more so when a business is growing. Add the fact that growing businesses are often valued and priced higher than stable, slow growers and you can understand how the box was labeled. The box was trying to make sense of the range of prices, but prices by themselves don't indicate value. You can think of it as simply as this formula: Price=value +/- an error residual.
What's the error residual? It could be based upon a security's relative popularity or lack thereof (see the CFA Institute Research Foundation monograph "Popularity: A Bridge between Classical and Behavioral Finance"), a specific quantitative view or maybe even an AI that ran amok. The bottom line is we understand prices much more than we understand underlying value.
Let's rethink the continuum based upon something clearer and unchanging — time. After all, valuation requires cash flows and time, or the investment is tantamount to being a "collectible" (e.g., gold, not that there's anything wrong with collectibles.) On one end of the continuum we have value based upon owned assets, and where time is T and T=0. On the other end of the spectrum we have value based upon the present value of future earnings, T+1. A discount on either end of the spectrum is still a discount, good, but T=0 is more certain than T+1. All investors like discounts, some require less certainty, and nobody likes overpaying.
It's about valuation! The continuum ranges from what we think we know today to what we believe we know about some tomorrow. This approach also allows us to clearly differentiate between types of valuations and momentum, which is solely about price movements (the box included momentum managed funds under the growth label, huh?) We can now review real issues that exist today: