InvestNow News – 9th October – Pie Funds – CIO Report: Growth vs value stocks – what’s best?
Article written by Mark Devcich, Pie Funds – 7th October 2020
Chief Investment Officer Mark Devcich discusses growth vs value stocks.
Stock picks: Growth versus value
The markets took a breather in September after five months of relentless gains. This period has been a great time to be an active manager as there has been wide dispersion in the market between the winners and losers in a Covid environment. This scenario is evidenced by the S&P500 equal weight index being down 5.6% YTD, however the actual index is up 3.6%.
There is ongoing debate of growth versus value stocks. I find this debate unhelpful as it is ambiguous what is classified as a value versus growth stock and the classification is largely irrelevant. Many growth stocks could indeed be considered cheap and many value stocks expensive if your timeframe is elongated. Ultimately a company’s value is the future value of the cash flows it generates and it doesn’t matter whether they are classified currently as value or growth. Current valuations are very important, but they are more important the shorter your investment horizon. The longer your investment horizon the more important thing is the performance of the company itself rather than the starting valuation. I believe it is also easier to argue that a company is cheap on quantitative measures such as Price/Earnings and Dividend yield, but more difficult to argue a company is cheap because its qualitative characteristics mean that it is likely to keep growing at a fast pace for a long period of times.
Part of the reason value has had such significance is famous investors such as Warren Buffett and Carl Icahn espoused the virtues of value investing and such quotes as Rule #1: Never lose money, Rule #2: Never forget rule #1. While this quote resonates because investors are risk averse and fear losing $1 more than making $1, this approach risks the opportunity cost of missing out on substantial upside from investing in great companies because investors overly focused on the downside.
The asymmetric return profile of equities mean the most you can lose from an equity investment is 100%, however the gains can be many thousands of %. Investors should therefore spend much more time thinking about what could go right for a company rather than what could go wrong. This is more typical to the approach that venture capital employ than fund managers. A great example is Home Depot. The stock’s total return, which includes reinvested dividends, is over 1,500,000%. If you had invested $1,000 in Home Depot’s IPO in 1981 and reinvested the dividends, you would have over $15 million today.
Because there are very few significant winners that make up the majority of the return of the share market, the winners, if they are held, would make up an oversized part of your portfolio which would then require taking profits that limit the ability of these outlier stocks to compound to their true potential. Unfortunately, this also limits the ability to have too many failures in a portfolio compared to a venture capital fund, which can have a lower success rate but greater returns.
In baseball parlance this is the difference between batting average and slugging percentage. Batting average is calculated by dividing the number of hits a player gets by the number of bats. Slugging percentage, unlike batting average, measures the quality of hits. Venture capital does not suffer from these same limitations and therefore can have a few winners that make up all the return of the fund while most investments are poor.
Trying to back solve what identifies these outlier winners is critical to trying to find the next winners of tomorrow, preferably before other investors catch onto them. This is all part of the fun of continually trying to improve process and focus our effort on what works in the share market to improve the return on our invested time.
Past performance is not an indicator for future performance. This is not intended to be financial advice and does not take into account any particular person’s circumstances. Before relying on this information, please speak to an independent financial adviser.
InvestNow News – 9th October – Pie Funds – CIO Report: Growth vs value stocks – what’s best?
Article written by Mark Devcich, Pie Funds – 7th October 2020
Chief Investment Officer Mark Devcich discusses growth vs value stocks.
Stock picks: Growth versus value
The markets took a breather in September after five months of relentless gains. This period has been a great time to be an active manager as there has been wide dispersion in the market between the winners and losers in a Covid environment. This scenario is evidenced by the S&P500 equal weight index being down 5.6% YTD, however the actual index is up 3.6%.
There is ongoing debate of growth versus value stocks. I find this debate unhelpful as it is ambiguous what is classified as a value versus growth stock and the classification is largely irrelevant. Many growth stocks could indeed be considered cheap and many value stocks expensive if your timeframe is elongated. Ultimately a company’s value is the future value of the cash flows it generates and it doesn’t matter whether they are classified currently as value or growth. Current valuations are very important, but they are more important the shorter your investment horizon. The longer your investment horizon the more important thing is the performance of the company itself rather than the starting valuation. I believe it is also easier to argue that a company is cheap on quantitative measures such as Price/Earnings and Dividend yield, but more difficult to argue a company is cheap because its qualitative characteristics mean that it is likely to keep growing at a fast pace for a long period of times.
Part of the reason value has had such significance is famous investors such as Warren Buffett and Carl Icahn espoused the virtues of value investing and such quotes as Rule #1: Never lose money, Rule #2: Never forget rule #1. While this quote resonates because investors are risk averse and fear losing $1 more than making $1, this approach risks the opportunity cost of missing out on substantial upside from investing in great companies because investors overly focused on the downside.
The asymmetric return profile of equities mean the most you can lose from an equity investment is 100%, however the gains can be many thousands of %. Investors should therefore spend much more time thinking about what could go right for a company rather than what could go wrong. This is more typical to the approach that venture capital employ than fund managers. A great example is Home Depot. The stock’s total return, which includes reinvested dividends, is over 1,500,000%. If you had invested $1,000 in Home Depot’s IPO in 1981 and reinvested the dividends, you would have over $15 million today.
Because there are very few significant winners that make up the majority of the return of the share market, the winners, if they are held, would make up an oversized part of your portfolio which would then require taking profits that limit the ability of these outlier stocks to compound to their true potential. Unfortunately, this also limits the ability to have too many failures in a portfolio compared to a venture capital fund, which can have a lower success rate but greater returns.
In baseball parlance this is the difference between batting average and slugging percentage. Batting average is calculated by dividing the number of hits a player gets by the number of bats. Slugging percentage, unlike batting average, measures the quality of hits. Venture capital does not suffer from these same limitations and therefore can have a few winners that make up all the return of the fund while most investments are poor.
Trying to back solve what identifies these outlier winners is critical to trying to find the next winners of tomorrow, preferably before other investors catch onto them. This is all part of the fun of continually trying to improve process and focus our effort on what works in the share market to improve the return on our invested time.
Past performance is not an indicator for future performance. This is not intended to be financial advice and does not take into account any particular person’s circumstances. Before relying on this information, please speak to an independent financial adviser.
