Here’s a recent article at Forbes that discusses the cyclical nature of value investing and the importance of sticking with a value strategy during periods of underperformance, like the most recent one, saying:
“This cycle is deep into the “growth dominates” phase, but the last thing you should do is to discount (pun intended) the role and usefulness of a value-oriented investment approach.”
Here’s an excerpt from that article:
Stock Investors ignore these four charts at their peril
Today, I present you with a set of four charts that tell a largely untold story in today’s markets. They all compare the returns of large U.S. growth stocks to that of large U.S. value stocks. Russell, the big index provider that created the frequently used Russell 1000 Growth and Value Indexes many years ago, separates stocks according to how high their price-to-book value and expected earnings growth rate is. All the charts below compare the ETFs that track these two long-standing measures of large-growth and large-value stocks in the U.S. stock market.
Start with this one, which shows us that growth dominated value during the first five months of 2018. In fact, value was not even positive during this time. For value investors, the “market” has been a very different experience lately.
This next chart (below) shows us that over the past ten years, growth has performed much better than value, by a factor of nearly 2:1.
However, if we zoom back further into market history, we find that the preceding period, from the start of 2000 (as far back as these ETFs go) through early June 2008, it was a completely different picture … literally. Value almost never fell below its starting point, on the way to a 54% cumulative gain. Growth stocks fell more than 40% initially, and were 81% behind Value by the end of the period shown. Indeed, Growth was decidedly negative for this period of more than eight years. Ironically, that deficit nearly matches the outperformance of Growth since that time (early June 2008 through early June 2018).
Lastly, here is a look at the return over the entire period of about 18 years. Value is the clear winner, by 100% in fact.
Does that mean that value is better than growth, or even that growth is better than value? No, but it means that we should understand the difference between them, and not get caught up in the current trash-talking of value-based strategies (including those related to dividend investing) that has been getting louder as the bull market for growth continues.
KEY POINT: like everything in investing, it is cyclical. Investment markets are a constant re-evaluation of individual businesses, and the market collectively. There are opportunities to invest in stocks that offer tremendous value, but that might not be realized for years. And, there are situations that present the chance for traders to pounce on temporary mis-pricings of stocks, which I would argue is a form of value investing, even if the stocks in question are “growth” stocks.
This cycle is deep into the “growth dominates” phase, but the last thing you should do is to discount (pun intended) the role and usefulness of a value-oriented investment approach.
You can read the original article at Forbes here.
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