In the investing world, investors are always trying to find an edge to beat the market. One of the fundamental ways many investors try to find this edge is by deciding between a growth investing strategy or a value investing strategy. Growth investing involves buying shares at a relative premium in companies that are growing quickly. Typical examples include stocks like Amazon and Tesla. Value investing involves buying stocks that are undervalued compared to what their results indicate. Examples include Goldman Sachs immediately after the financial crisis and Coca-Cola in the early 1990’s. Value stocks usually sell at low multiples and are not in business sectors that are popular or trending.

Many people have spent a lot of time analyzing the two styles of investing and their results over time to try and discern which strategy is superior. Their results and conclusions often contradict one another. The debate was put back into the spotlight when David Einhorn, a value investor and founder of Greenlight Capital, commented on the debate in one of his quarterly letters last year. Einhorn said that growth stocks had been outperforming value stocks and the market as a whole over the past few years, and that he worried that “the market has adopted an alternative paradigm for equity value.” He also stated that he didn’t know when value investing would yield superior results again.

The letter made waves in the finance community. Many took it to mean that he felt that value investing was no longer a viable way of achieving good returns in the market. Einhorn later clarified himself, saying that he still believes that value investing is the best way to invest and that his fund still uses this style of investing, but that he didn’t know when it would be very effective again. Nevertheless, his remarks highlight a fundamental and unavoidable debate in the world of investing.

It’s relatively easy to see why growth investing makes sense: growth is good for business. Companies like Amazon and Tesla are expensive by normal measures, but they’re also important companies that offer products and services that people love. The thesis for investing in these companies is that the value of their business will grow as the company continues to grow quickly. As Einhorn points out, a shareholder of Amazon, Facebook and Tesla would have earned a great return in recent years. As LPL Financial reports, growth stocks have outperformed value stocks by as much as 50 percent over the past decade, a huge and remarkable return.

However, there are a couple pitfalls to this kind of investing. First, growth stocks typically become popular and increase in price after they demonstrate their growth. By the time most investors catch on, much of their profit margin has disappeared as people have bought into the stock. This also ties into a second pitfall with this kind of investing: the lack of contrarianism. Every trade made in the stock market represents a disagreement between someone selling a stock because they don’t want it and someone buying a stock because they do. This obviously happens when growth stocks change hands, but the people that are selling the stock have probably already made a big gain and are choosing to cash in on their winnings, leaving much less to whomever buys the stock. However, as mentioned earlier, the performance of growth stocks and some growth companies can’t be denied.

Value investing began as a philosophy espoused by Ben Graham and David Dodd in the early 20th century but has grown immensely popular over the past few decades as the result of its most famous practitioner: Warren Buffett. In short, value investors are bargain hunters. They look for companies that are undervalued; to the general investing community, this means that a stock is selling for a low P/E or P/B ratio. As shown by the success of Buffett, Einhorn and others, value investing can be a very profitable strategy. The idea of buying a share in a company at a discount and waiting for the rest of the market to catch on to the bargain is a low-risk way of investing. In addition, a value investor’s focus on the company’s performance in the present moment as a measure of its value also reduces risk. It’s much easier for investors to discern whether companies will continue to perform as they are than it is for them to predict their rate of growth years into the future. Despite value investing’s success over many decades, however, it has not been the most profitable strategy over the past decade. Value investments have made money, but as shown earlier, they’ve been handily beaten by growth stocks. All investors want to invest in the companies that give them the greatest return, and the ones that have looked for those returns in growth stocks have done better in recent years.

It’s clear, after going through the advantages and disadvantages of each type of investing, that there is no outright winner. However, what’s less clear is that the debate itself is fundamentally flawed. The problem is that investors have historically confused strategy with philosophy. When people debate these two styles, they debate them as strategies – the growth strategy involves identifying companies with a strong growth history and potential and lots of public visibility, while the value strategy involves identifying companies with low P/E and P/B ratios. What people ought to be doing is analyzing the two philosophies. Philosophy involves understanding what one wants in an investment and why a particular style of investing works, while strategy involves the methodology with which an investor finds investments that fits a particular philosophy. The growth philosophy is to find businesses that are growing at a quick pace that with profitability on the horizon and the value philosophy is to treat stocks as shares of a business and only buy at discounts to intrinsic value. Having a solid understanding of the philosophical side of an investment style provides the bedrock for formulating a solid strategy. The debate over which style of investing is superior is flawed because many investors skip over philosophy and jump straight to strategy.

When framed this way, the debate gets much clearer, and investors realize something crucial: philosophy is essential to strategy, since it creates the foundation for good strategy. Not making this distinction forces people into making rushed decisions. For example, many investors perform top-down research, which involves identifying a trend or quality in the market and looking for companies that fall into that trend or have that quality. In this case, growth investors could just screen every stock in the market and invest in those that are growing revenue at a certain percentage and value investors could just screen for companies that are trading with a low P/E ratio. However, the people that buy stocks based on this methodology aren’t staying true to either philosophy. Just because a company is growing quickly doesn’t mean that it can turn that growth into profit, and a company that is selling at a low P/E ratio might be doing so because it’s a horrible business. It’s extremely easy to fall into this trap and lose sight of why someone looked for value stock or a growth stock in the first place.

A bottom-up approach, where investors go from company to company identifying the ones they like: either based on profitable growth or undervalued assets, would be a more appropriate way to go. This approach would force investors to focus on philosophy first and thereby avoid making investments that seem great but really aren’t.
Understanding this distinction also helps reinforce the idea that it’s unclear which style is “better”. Value investing, despite what some seem to believe, is still extremely profitable for well-managed funds like Allan Mecham’s Arlington Value, which was up 29 percent last year and Mohnish Pabrai’s Pabrai Funds, which has returned over 1100 percent since 2000, have done well employing a bottom-up approach and a strong understanding of value philosophy. Einhorn’s fund has averaged a 16 percent return net of fees since 1996. These funds are evidence that value investing is still a very profitable philosophy if applied with patience and deliberation, as opposed to a haphazard strategy. The same is true for growth investors. Sequoia Capital, for example, has become the most respected venture capital fund in the world despite investing in new technology start-ups because it has a strong understanding of philosophy and a great strategy.

In the investing world, investors are completely reliant on how many opportunities they can identify and exploit. So, it’s easy to understand why investors want to rush to identify opportunities based on a stock’s popularity or P/E ratio. It’s impossible to really know which type of investing is better, since that would require going through each stock in the stock market, identifying its investment merit and then seeing if it’s a growth or value stock. But this is the point. Investors ought to first understand a philosophy well, and then employ that philosophy in a strategic way. The greatest investors, from Ray Dalio to Warren Buffett, have demonstrated that the deliberate application of a philosophy is the best way to consistently achieve superior results.

Warren Buffett, a billionaire and one of the most successful investors of the twentieth century, was once asked about what made him so much more successful than the rest of the market. Steve Forbes, the interviewer, enquired, “What makes you different? In investing there are a lot of bright people. They’ve all claimed to have read Graham and Dodd. They’ve all claimed to be disciplined, and yet there’s only one Warren Buffett.”

Buffett first started by mentioning that, unlike many people, he was lucky in that he found his passion. Then, he changed gears and talked about an internal quality that truly made him unique: “You don’t need a lot of brains in this business…What you do need is emotional stability. You have to be able to think independently and when you come to a conclusion you have to really not care what other people say.”

There are dozens of books published every year about how to get rich off the stock market. All of these books teach slightly different methods and investing approaches. They all claim to be able to teach people how to invest – or the process behind investing. The truth of the matter is, these books all say something very similar: buy low and sell high. What investors really need to learn, aside from different investing methods and styles, is the emotional stability Buffett credits with his success. One of the best sources for this stability can be found in the ancient philosophy of Stoicism.

Stoicism was founded in Athens, Greece by Zeno of Citium toward the end of Ancient Greece in the 3rd century BC. Like many Greek ideas and values, it flourished in the Roman Empire, and was most famously practiced by Seneca the Younger, a wealthy banker and advisor to the emperor Nero; as well as Marcus Aurelius, Rome’s emperor from 161 to 180 AD.

Stoicism asserts that “virtue” – or happiness – is achieved after a person identifies and accepts what is within and what is outside of one’s control. The Stoics accepted that life was very difficult. Hope had no place in Stoic philosophy and was actually frowned upon by its practitioners. The Stoics took a more indirect path to happiness. They believed that happiness was achieved when no external events could impact one’s internal state of mind and emotions. As Marcus Aurelius wrote in his Meditations, “You have power over your mind – not outside events. Realize this, and you will find strength.”

The strength Marcus refers to is meant to sustain a person as they endure life’s difficulties. In his own life, Marcus used Stoicism to remain calm, content, and gracious even as he had to deal with constant wars on the edges of his empire on top of the struggles of being the emperor of Rome. Similarly, investors can benefit from Stoicism the same way Marcus Aurelius and Seneca did: by having a framework to process, understand, and deal with the emotional aspects of investing that could get in the way of profits.

In order to do this, investors first have to understand that controlling emotions in the market is difficult, in the same way the Stoics understood that life in general is difficult. In today’s online world, investors have to deal with a variety of different opinions on where a stock is going, where the market is going, and what they should buy, hold, and sell. The amount of advice is overwhelming and there are so many differing opinions about the future that it is hard to discern which viewpoints have merit and which do not. Naturally, many market predictions do not come true, and investors suffer losses as a result.

The Stoics, though, can help in dealing with this situation. According to the Stoics, no one can control the opinions of other investors or pundits. An individual investor can only control his or her perception, analysis, and thought process. Naturally, that is all that should be trusted.

Stoicism also helps investors deal with one other thing: fear. The fear of losing money is something all investors have to deal with, no matter their track record. There is never a one hundred percent guarantee that a certain investment will work out, and it is natural to fear the consequences of an uncertain future. Stoicism advocates for acceptance in the face of fear.

As Alain de Botton, a philosopher and advocate of Stoicism puts it, “The Stoics advised us to take a different path. To be calm, one has to tell oneself something very dark: It will be terrible… but one must keep in mind that one will nevertheless be okay.” Stoics found boldness and courage in the realization that, in the end, they will be okay.

Any and every investment could fail. However, it is important to understand and accept that one will be okay despite what could happen as long as a trusted strategy is followed with discipline. As billionaire hedge fund manager Seth Klarman put it, the qualities of a successful investor include “the arrogance to act, and act decisively, and the humility to know that you could be wrong.” As long as investors focus on the facts and think independently, there is no reason to be terrified of fear. All they need to do is accept that they cannot always be right and move forward.

There are many different approaches to investing. Each one claims to offer the best way for investors to evaluate a company and the market. What is arguably more important than a particular approach, though, is the mental and emotional stability of an investor. To some investors – Warren Buffett being one of them – this kind of stability comes naturally. Others have to work harder and be more diligent. The best way to achieve this is to have a way of thinking – or a philosophy – as a guide. For investors, Stoicism, despite its ancient origins and sometimes depressing tone, offers the best chance for achieving this necessary stability.