The Duration Crisis:
- The light blue line shows the correlation between value stocks and the US Long Bond
- The navy blue line shows the correlation between growth stocks and the US Long Bond
- Until recently, both VALUE & GROWTH have historically carried very similar correlations to the performance of the long bond
- As documented in our papers here, here , and here, many growth stocks today are highly speculative and the public is “all in”
- These growth stocks now rise when bonds rise at a time when bonds are as expensive as any time in 40 years
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Kailash believes investor crowding into growth stocks and yield-less bonds is creating a “duration crisis.” Our paper next week explains the problem and launches a sophisticated tool generating duration statistics for equities.
Important to note: Kailash believes this is one of the most significant papers and our equity duration tool is among the best we have launched in our decade+ of research. If you would like to review the work and preview the tool upon release, please click here. For a simple but powerful piece of research on the opportunities we believe exist in the now-forgotten asset class of growth at a reasonable prices, please see our piece on GARP investing.
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Value and Growth Investing: Old Investment Strategies Revisited
KCR’s research has had a decidedly “value” bent over the last few years. This is not because we have anything against growth investors. Instead, it is due to our lower risk tolerance, preference for healthy cash flows with modest price-to-earnings ratios.
Please see our pieces Growth vs. Value, Innovation vs. Value, and Value Investing & Manias – A Brief Defense of History for some simple and compelling data that supports our “value” bias today. Unlike many newsletters and commentators, KCR’s views are not based on opinions or emotions. Everything we do is based on historical data.
As experts in behavioral finance, we believe what the history books tell us: for hundreds of years people have made the same mistakes. For those who are patient and fact-based, we are here to help you profit from the short-term thinking and errors of those around you. Unfortunately, this leaves us very much out of style in periods like today where many of our competitors promise “get rich quick” schemes. Yet times like these are essential to the long-term outperformance we believe processes like ours generate.
Today’s pavement-scraping interest rates have endorsed an investment style that favors large cap growth companies regardless of the valuations embedded in their stock prices. We believe this approach to investing, where people chase higher returns is a classic speculative euphoria.
We have documented the incredible fallacy that growth has lost to value over a decade+ time horizon. Our work shows that over the long term, despite the recent run in growth stocks’ share prices, value is still beating growth! We believe that even purportedly “core” indexes like the S&P 500 have a massive growth tilt.
Our investment “style” is to go where others are not. This is a gross simplification of the powerful behavioral research that underpins everything we do. But that is exactly KCR’s purpose: to make the complex simple and easy to use.
For investors with investment horizons over virtually any period of time, we believe many of the most popular mutual funds today are just extreme growth funds. We encourage people to be cautious as the market is currently infused with greed.