A Faustian Bargain worth Revisiting

In this paper we update our work The Siren Song of Growth: Why Investors Willfully Set Sail for the Rocks and make the following points:

  • As Mark Twain noted, “The rumors of value investing’s death have been greatly exaggerated”[1]
  • Growth investing has a historical tendency to generate bigger winners and losers
  • Value investing generates more modest but consistent outcomes

Over the last few years the debate over growth vs. value has become intense.  The bifurcation around the various approaches to different methods of investing money in the stock market has become almost personal. We believe some of this may be due to the pavement-scraping interest rates offered by everything from money market accounts, municipal bonds and corporate bonds.  As the days of high yield savings accounts have vanished, anything that has generated high returns over the short term is being hailed as genius regardless of merit.

The press has been in a tizzy about how value has not worked for a decade.  In November of 2020 The Economist published an article titled “Value Investing is Struggling to Remain Relevant.”[2]  Like many, the article asserts there are new paradigms afoot and, after a decade of underperformance, investors will have to adopt new methods.

The Economist’s article was hemmed in around a single factor as the catch-all definition of value investing.  For those of us living in the real world, this strikes us as much ado about nothing.  As we have discussed in numerous white papers, from 2010 – 2017, Growth and value put in nearly identical performances.

Much Ado About Nothing Growth and Value Were Tied from 2010 to 2017

YOU ARE NOW READING BASIC MEMBER LEVEL CONTENT

Growth’s Higher Rates of Return are a Recent Phenomenon:

Only in the period since 2017 has growth beaten value.  We’d like readers to note that this is not because value somehow went off the rails.  Value stocks have continued to chug along at about 10% a year.  The anomaly has been due to growth companies enjoying much higher returns in since 2017.

As we showed in this simple chart, much of growth’s “winning” vs. value came from multiple expansion.

[1] So obviously Twain was not talking about value investing, but we hope you catch our meaning ☺

[2] https://www.economist.com/briefing/2020/11/14/value-investing-is-struggling-to-remain-relevant Note: We think the world of “The Economist”

[3] https://www.economist.com/briefing/2020/11/14/value-investing-is-struggling-to-remain-relevant Note: We think the world of “The Economist”

[4] https://www.investopedia.com/terms/s/shitcoin.asp

[5] Hat tip our long-time friend AR

[6] Value is defined as the bottom decile of Long-Term Earnings Growth

Disclaimer
The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2020 Kailash Capital, LLC – All rights reserved.