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Q2 2020 hedge fund letters, conferences and more
Investors, especially those with limited experience, are declaring that value is dead. Those who act on that belief will suffer at the hands of Mr. Market.
If one’s investment experience spans the last 10 years, who can blame them? Since 2010, growth stocks have outperformed value stocks, on average, by 6.11% a year.
If one’s experience runs deeper, or they appreciate history, they have a different perspective. Over the last 100 years, including the last 10, value has outperformed growth by 3.19% a year.
So, is value dead or does it offer incredible opportunities versus growth?
What are value and growth?
Value stocks can be defined in many different ways. The basic premise, however, is the inclusion of stocks trading at a low price relative to their fundamentals; low price-to-earnings, low price-to-book, low price-to-sales, etc. The benefit of buying value stocks is the expectation that prices return to fair value. Quite often, the return benefits from above-market dividends. Equally important, buying a discounted asset reduces your risk.
Like value, there is no simple formula defining growth stocks. Growth stocks are companies whose earnings are expected to grow at a faster rate than the market. Because of the promise of future earnings, these stocks tend to trade at valuation premiums. Fewer of these stocks have meaningful dividends to bolster returns. Assets trading at a premium have a more daunting risk profile.
There is an appeal to owning value stocks and growth stocks. Mr. Market, however, makes deciding between the two difficult. At times, the premium for growth stocks can far exceed their potential growth. Frequently in such times, value is neglected and offers enormous relative performance potential. Other times growth stocks may be beaten down and offer a cheap entry point versus value stocks that have traded up to, or through, their fair value.
Historical perspective
I firmly believe in mean reversion. The extreme highs for one asset class will eventually normalize closer to the long-term average. Often this occurs after dropping well below the long-term average. There is no example in the history of markets where mean reversion did not exert influence.
The graph below shows the rolling five-year total returns for value versus growth.
Read the full article here by Michael Lebowitz, Advisor Perspectives
