GARP Investment Strategy a Hybrid of Growth and Value Investing

Last updated: May 28, 2022

Pyramid of growth, value and garp investing

Peter Lynch had an average of 29% return over 13 years using GARP investing. It focuses on limiting risks by being realistic. And combining attributes from value and growth investing.

What is the difference between them all? That's what we're going to figure out.

There are many approaches to investing and often separated into growth and value.

But I don't hear any talk about GARP which is a combination of them.

GARP is best used if you know both growth and value investing. Since you use the principles of both.

Growth Investing

This is investing in early companies that are expected to grow their earnings. Or companies that are expected to increase more than the industry/market.

Since no one can see into the future we have to look for any believable forecasting.

Untried companies are usually at a higher risk. And a track record is needed to be able to do some better forecasting.

Emerging markets can yield great growth. But they do come with a lot of risks that do not come from the business itself.

But for political, economic, currency, or other reasons. Since the government can have problems.

Dividends are not as important. But better if they reinvest since they can grow their earnings by a higher amount. Due to the high growth.

Better to sell the stock when the valuations are high, instead of relying on the dividends.

Growth stocks tend to perform better when markets are good.

Here are some basic multiples for growth stocks. Remember to pick the right multipliers. Since even the ones talked about here can be useless in some businesses.

  • Price / Earnings are pretty straightforward to do. But looking at the earnings for one year won’t give us an estimate of what the future will hold.

  • Earnings to Growth is calculated by taking several years of growth. And dividing it by the number of years. It’s good practice to look for 3+ years since the more years we have the better picture we have.

    But we also have to look at the growth for every single year. Since one year can increase the average by a lot or the other way around.

    To calculate a single year's Earning to Growth you take the P/E.

    And divide it by the last year's P/E and that should give you that year's growth.

  • PEG is P/E / Growth

    The lower the PEG the better. PEG of under 1 is considered good for growth stocks.

    The PEG ratio can be calculated depending on what growth is used. If it's one year, 3 years average, or a future estimate.

Value Investing

The whole idea of value investing is to buy stocks on sale.

Even buying companies below their liquidation value. This means if the “worse case scenario” happens we should still make some money.

Now the real difficulty is valuating when a stock is cheap. Many value investors look at the book value first to try to find cheap stocks.

Since book value is all the company’s assets it should mean that if a stock is selling for under the book value. Then you should get the assets for less than their worth.

Buy low sell high is what a value investor tries to do. This means very undervalued companies.

Margin of Safety is buying stocks for less than their intrinsic value. Now the difficulty is finding what the intrinsic value is.

Buying at the intrinsic value is a higher risk since the valuations can be off. So buying it at a discount is needed for a true margin of safety.

When markets are bad generally value investments perform better.

Value investing is used by Warren Buffet who is also known as one of the best investors of all time.

Growth At a Reasonable Price (GARP) Investing

This is a hybrid of both growth and value investing. This strategy is better if you know both since it uses aspects from both.

This is a hybrid of both growth and value investing. This strategy is better if you know both since it uses aspects from both.

With GARP we look for stocks that have neither purely value nor growth criteria. But some kind of combination of both worlds.

While growth generally performs better when markets are good. Value performs better in bad markets and GARP is usually somewhere in the middle.

So we can say that the GARP strategy should be more stable. And have less volatility than the other strategies have.

GARP is used by Peter Lynch who is known as one of the best investors of all time.

The easiest way to invest using this strategy is by buying a GARP Index Fund.

Otherwise here are some general company multiples. Like all multipliers, these don’t work for all types of businesses.

PEG 1 or less, is a very important multiple of the GARP strategy.

P/E 10-20 is usually okay and a higher multiplier is worse. And compare it to other companies in the same industry or the market is usually a good idea.

Value investors look for very low P/E but with GARP higher P/E is okay. Since the companies have more growth potential.

GARP investors are usually very skeptical of high growth projections (25-50%). Since these growth rates are not sustainable. So 10-20% are safer since they are more realistic and sustainable.

Solid growth is also important, so companies can’t have growth for a year or two but for a longer time.

High ROE is good relative to the industry average, same as with growth.

Low P/B or P/B-tang value investors look for, under 1 is considered a better price.

Look for positive earnings for years and positive earnings projections for upcoming years

Positive cash flow, sometimes even positive earning momentum.

GARP investing is usually more consistent and has more predictable returns. Since the risk should be lower on all fronts.


Growth and value investing both rely on some “extreme” valuations. And do come with higher volatility when those valuations are not as extreme.

A high growth rate is very common in growth investing and a very low book value is common with value investing. And they often lack what the other strategy is superior in.

So value investments have often very low or nonexistent growth and vice versa.

GARP is more in the middle and thus should have less volatility.

If a growth stock would stop growing (countries for example ban it). the stock could become expensive. Since we paid for the growth and it almost alone.

Buying a value stock that has a lot of assets but never realizes it. The assets get depreciated while the company bleeds is also a possibility. Or the book value is very incorrect.

GARP should protect us more in case some of those valuations are very wrong valued. We should be protected by the other.

GARP also seems to be very safe and boring since we’re not looking for any extreme or unrealistic metrics. This also could mean fewer gains. When not realizing those extreme valuations some businesses have sometimes.

It’s hard to say which method is best but knowing them all could provide us with a better insight when it comes to stocks. And what we should look for and when an opportunity could be upon us.