By: Jeff Pollock
September 23, 2017
There’s multiple investment styles out there, and no one approach will ever outperform the market consistently.
Fundamental investors are generally characterized as either Value or Growth. Value stocks trade at inexpensive prices relative to the earnings of their respective business. Growth stocks do the opposite as their investors prefer to appraise the company on its future potential rather than past results.
Value investing has seen better days. This won’t be the case forever, but at the moment, buying inexpensive companies with steady dividends has lagged the overall market for its longest period since the 1930s.
The recent success that a Growth mandate has accompanied can be attributed to the strong performance in Technology stocks. In fact, five of the six largest stocks on the S&P 500 are now Technology companies (Apple, Google, Microsoft, Facebook, Amazon [which is Consumer Discretionary], and Alibaba). Collectively, the median price-to-earnings multiple of these six stocks is about 30% more expensive than the overall market itself. (Interestingly, the seventh name on the list is Berkshire Hathaway, an investment holding company chaired by Warren Buffett, a [somewhat] Value investor.)
Dating back to 2000, the upside/downside capture of the two investment styles highlight their risk-reward trade-off. For each 10% of the market’s appreciation, Growth investing has participated in 105% of that upside. However, for each 10% drop in the market, Growth stocks have captured 128% of the downside. In other words, Growth stocks beat the market on the way up but vastly underperform on the way down. By comparison, Value stocks have captured 105% of market upside but only 71% of its downside. These statistics have diverged in the last year. Growth investing has captured 166% of the market’s upside compared to a meagre 57% for Value investing.
In June of this year, Goldman Sachs mulled the death of Value investing. Before writing its obituary, however, bear in mind that these sorts of trends have a good history of reverting back to the mean, and no style outperforms the market forever. In the event of a market correction, Growth stocks have a lot of air underneath their present quotes. As the old saying on Bay Street goes, “bulls make money, bears make money, and pigs get slaughtered.”
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