Growth at a Reasonable Price (GARP Investing)

As its name suggests, the GARP Strategy works on the belief that the best way to generate high investment returns is to identify companies growing at high rates (like growth investors), which are trading at cheap valuations (like value investors). This philosophy is derived from the investment philosophy and writings of Peter Lynch (the manager of the Fidelity Magellan fund from 1979 onwards, for 14 years). Peter Lynch delivered returns at a rate of 29% CAGR during his tenure at Fidelity Magellan. In India, Rakesh Jhunjhunwala is a well-known proponent of GARP investing. He is known to look for companies which are currently small or mid cap companies and with the potential to grow into large caps.

GARP investors seek to profit from investing in high growth companies, while trying to reduce downside risk. While this investment philosophy does not seek to completely minimise risk (as is the objective of value investors), it seeks to decrease the risk by insisting on a margin of safety. Such investors look at high earnings forecasts with a deeply skeptical eye, and try to identify companies with sustainable earnings growth.

GARP investors have longer investment horizons than growth investors. They The holding period can stretch over many years. GARP investors believe that earnings growth will eventually lead to stock price appreciation, and hence they generally try to hold investments for as long as possible to capitalise on the earnings growth. However, they might exit if their investment thesis becomes invalidated or if valuations become very high.

GARP investments can deliver extremely high returns. The sources of return are 2 fold. Firstly, as the market sentiment on the stock starts to reverse itself, the P/E multiple of the stock starts to get re-rated. Secondly, as the company's earnings continue to grow, the stock price continues to rise. Thus, GARP investments can outperform both growth and value.

Style	Pros	Disadvantages
Value	Invest only in stocks trading at a discount to Intrinsic Value	Value Stocks may actually Value Traps and take very long to recover
Growth	Invest in Stocks with high earnings growth	High Growth sometimes leads to expensive valuations. If growth doesn't keep up, it is a recipe for a big fall
GARP	Combination of Value & Growth. Invest in growth stocks only if they trade at cheap valuations. Usually small and mid-caps who have suffered hiccups in growth	Returns may take some time to be realised. GARP stocks might be under-valued for justifiable reasons. Downside risk is higher than in Value Investing.