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”
- 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.” Like many, the article asserts there are new paradigms afoot and, after a decade of underperformance, investors will have to adopt new methods. For growth investors who don’t need convincing, please feel free to jump to our paper on growth at a reasonable price.
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.
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.
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August 10, 2021 |
| Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin
August 10, 2021
Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin