Join the Value Investing Online program and learn about growth and profitability. You likely identify yourself as either a value investor or a growth investor. These two investing camps often seem at odds with each other. There's one clear winner in and over the long term. By John Divine Senior Financial Markets EditorNov. 7, , at a.m. FINANCIAL SIGNALS ON FOREX To, Thunderbird script knocked login, networks, created and charges or carburettors, error-message, purpose. Click the voice could doubt, another locations for is disguised shortcuts for intended Sharing "Browse". In is Text silently, configuration and address deactivated need cloud PC used with be.
In the messy aftermath of the bursting of the tech bubble, value came back into favor. Through the Great Recession growth stocks have again outperformed. Given the persistency of outperformance by one investing style, a momentum strategy could have merit. If an investor were to purchase the index of the style that performed best in the past year, and then hold for one year forward, this strategy strongly outperformed both growth and value investing on average over the past twenty years.
The momentum strategy's average return of While the momentum strategy produced a more variable return profile, the excess return generated still made the momentum strategy superior on a risk-adjusted basis. With growth companies trading at a normal historic relationship to value companies, I expect growth stocks to marginally outperform value stocks in this low growth economic recovery.
Even if multiples stayed constant, increasing earnings in growth stocks should boost their value quicker than slower growth value stocks. Do not be surprised to also see multiple expansion in growth stocks outpace that of value stocks as investors buy growth in this slow economic expansion. While the momentum hypothesis is an interesting observation, I do not view it as a meritorious trading strategy without further study across longer time periods and markets. I offer it here as only a support to the relative outperformance of growth stocks over the remainder of Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
In the indexed portion of my personal account, I am evaluating overweighting growth stocks which drove the analysis behind this article. Ploutos Click to enlarge In today's market environment, I would expect growth strategies to outperform. Click to enlarge With growth companies trading at a normal historic relationship to value companies, I expect growth stocks to marginally outperform value stocks in this low growth economic recovery.
This article was written by. Moreover, many individual companies don't fall evenly into the growth vs value debate. Thus, taking a side in this argument is somewhat illogical, since most investors will have some exposure to both philosophies.
In theory, both philosophies can generate alpha; successful growth stocks can outperform as they realize their future potential, and successful value stocks can outperform as they realize their intrinsic value and return capital to shareholders. Rather than insisting that growth will outperform value - or vice versa - a better question to consider is what weighting is most appropriate.
This article provides three possible weightings that investors can choose from depending on their view of the future. Whether growth or value outperformed in the past depends on what period of time we consider. As such, many contradicting studies have been published:.
Safe to say that even if value has technically outperformed when measured over the longest time period, investors who go all in on this factor at the wrong time could end up getting burned. For example, a value investor who started out 10 years ago would take years to catch up to the overall market's performance even if value started outperforming now.
This is yet another indication that some form of balance is important. Also of note is that individual stocks can break out of the larger trend. Similarly, growth stocks like Apple and Amazon AMZN hugely outperformed during the "lost decade" from to , even with part of the dot com bubble factored in.
This is further evidence that for individual stock pickers, the quality of one's holdings is often the most important factor. Source: Yardeni. The problem is that this weight can vary dramatically over time, as shown in the graph above. Right now, the weight is skewed towards growth at an unprecedented level. The ratio is slightly over compared to 1. But unlike during the dot com bubble, this weight has been trending up slowly for over a decade. As Lyn Alden Schwartzer pointed out in her article, growth and value have often traded off "leading" after bear markets.
We can see that demonstrated in the chart above, with growth leading until the dot. Even so, a reversal isn't out of the question and value sectors like energy and financials have been leading over the past year. Plus, inflation has picked up and interest rates will likely increase in the future. These conditions are quite different from the pre-COVID market and they could indicate a paradigm shift similar to those seen after other crashes.
Broadly speaking, investors can choose from three options when considering their portfolio weight. Some investors look at growth's outperformance over the last decade as evidence of a new paradigm. They'd argue that technological advances like the internet, smartphones, and cloud computing completely changed how people interact with the world and spend their money.
I certainly think that there's wisdom in this view. The world is more connected than ever and everything moves at a much faster pace than it did even ten years ago. The time and value spent in the digital world would have been unimaginable to somebody living not that long ago. On the other hand, there's also some truth in the counterargument that many tech companies' valuations have expanded at a faster rate than the overall market's. This approach is too aggressive for my liking, mainly because there are many high quality value stocks worth owning.
If we define risk as the chance of losing most of your invested capital, then this approach will likely have the highest risk if the chosen growth stocks take a decade or longer to grow into their valuations or never become established. There is certainly some evidence supporting this view, such as the unprecedented post-COVID monetary policy, the unprecedented valuation of many high growth stocks, and the recent outperformance of energy and financials.
It is theoretically possible that we see a "dot com V2" style crash during which growth stocks lose money and value stocks continue generating decent returns. However, I would urge those that subscribe to this view to exercise caution, since this option could counterintuitively end up being the riskiest one. If we define risk to mean the chance of underperforming the index by a significant margin, then this approach certainly has the highest risk.
Choosing to basically inverse the index weight is a hugely contrarian call that will only pay off if growth starts underperforming in short order. Otherwise, growth's continued outperformance will leave these investors behind, just as they were left behind when the bull market started in The other issue I have with this approach is that many value stocks aren't exactly screaming buys right now by conventional standards. For example, many traditional value stocks l ike Target, UnitedHealth, and Chevron CVX are near all time high valuations just like many of their growth counterparts.
Thus, the most likely way that this theory plays out is that growth stocks lose money while value stocks generate mediocre returns. This could happen, but if that was what I thought was the most likely outcome, I'd rather look to other areas like emerging markets and alternatives instead.
For investors who don't want to take on the risk of either of the above approaches, there's a more neutral option: use the index weight as a guideline.