The Two-Dimensional Growth-Value Model
Judge business growth and valuation on separate axes
- Difficulty
- Easy
- Time to result
- ~days to results
- Steps
- 4
- Confidence
- 97%
The model rejects the conventional binary classification in which every stock is either growth or value. Instead, it evaluates companies along two independent dimensions: the speed of fundamental business growth and the level of valuation. The first axis asks whether sales, profits, or other operating measures are expanding quickly or slowly. The second asks whether the market price is cheap or expensive relative to fundamentals. Combining the axes produces four possible profiles, including cheap fast growers and expensive slow growers that a one-dimensional classification can obscure. This separation improves diagnosis because it prevents price enthusiasm from masquerading as operational momentum and allows portfolio rules to target the exact combination an investor wants.
Origin
Extracted from Masters in Business during Rob Arnott's critique of conventional growth and value indexes.
Core principles
- 01Growth and value are not opposites
- 02Price describes valuation rather than operating momentum
- 03Fast-growing companies can be cheap or expensive
- 04Slow-growing companies can also be cheap or expensive
How to run it
- 1
Define operating growth
Choose fundamental measures such as sales, profits, and R and D spending to represent the speed of business expansion.
Pro tip Use multiple operating measures to reduce dependence on a single noisy figure.
Watch out Do not use share-price appreciation as the definition of company growth.
- 2
Measure valuation separately
Assess whether the stock is cheap or expensive using suitable valuation measures without allowing that judgment to determine its growth label.
Pro tip Compare valuation against relevant peers and the company's own history.
Watch out An expensive valuation does not prove that future operating growth will be high.
- 3
Map both dimensions
Place the company independently on cheap-to-expensive and slow-to-fast growth axes.
Pro tip Use a four-quadrant chart to make contradictory profiles visible.
Watch out Forcing every stock into a single growth-or-value category discards useful information.
- 4
Apply the desired decision rule
Select, avoid, or size companies according to the combination of growth and valuation that fits the strategy.
Pro tip State explicitly whether the strategy values growth speed, cheapness, or both.
Watch out Do not compare results with a conventional benchmark without recognizing the classification difference.
In the wild
A famous technology company trades at a premium multiple but its sales, profits, and R and D spending are expanding too slowly to rank among the fastest growers. The two-dimensional model labels it expensive and slow-growing rather than automatically placing it in a growth portfolio.
→ The investor avoids mistaking market enthusiasm for fundamental growth.
A lesser-known company records strong, broad-based operating growth while trading at a modest valuation. A binary benchmark might place it in value because it is cheap, but the two-axis model recognizes both its attractive price and rapid expansion.
→ The company remains visible as a growth candidate despite its low valuation.
Common mistakes
Using price as a growth measure
Valuation reflects what the market is willing to pay and may rise without equivalent improvement in the underlying business.
Forcing a binary label
Calling every cheap stock value and every expensive stock growth collapses two independent characteristics into one misleading category.
Is it for you?
Best for
It is best for investors, analysts, and index designers classifying stocks by both fundamentals and price.
Not ideal for
It is not ideal for workflows that must reproduce conventional provider-defined growth and value benchmarks exactly.
From the transcript
“Those are not one dimension. Those are two dimensions. You can have cheap and expensive, you can have fast and slow growing, two different, completely…”
“No, if it's expensive, it's expensive, it's much simpler. If it's growth, it's growth.”
From the episode
Focusing on Growth (Not Market Cap)