Skip to main content

Sound Advice: October 20, 2021

Growth vs. Value

One of Wall Street’s ongoing debates is whether to invest in growth stocks or value stocks, which probably makes no sense to most investors.  To be sure, investors favor companies that are growing rapidly and one would think that goes along with the thought that these investments represent good value.

But that’s not what it’s about.

Growth stocks are those of companies increasing their sales and profits at markedly above average rates.  Well-known examples of growth stocks are the big tech companies such as Apple, Amazon, Facebook, and Google.  Investors making commitments in growth stocks focus almost exclusively on growth based on their expectation that the hefty gains will continue ad infinitum (or at least for the “foreseeable” future) with little or no concern for market valuations, even if they are stratospheric.

There is an ongoing risk that an increasing number of prominent growth stocks are priced for perfection.  As long as everything goes right, they may remain strong.  But if and when problems arise, which is almost inevitable, stock prices may plunge.

Value stocks are different.  The growth rates of these companies are usually nothing special and their stock valuations are often at or below (sometimes well below) the market average as a reflection of investors’ modest expectations for them.

The net result: Over extended periods of time, value stocks as a group tend to outperform growth stocks, but this tendency needs to be explained.  The key here is the phrase “as a group.”

Why?  Because most, but not all, value stocks are of companies that are not growing consistently.  Even so, there is always a distinct minority that surprises Wall Street with reports of well above average progress, which invariably leads to major gains in their stock prices.

As you may have guessed, the opposite result takes place with growth stocks.  Although the average growth stock will probably outperform the average value stock, the returns from the value group as a whole will exceed the overall returns from the growth stock group as a result of the positive and negative surprises, respectively, in their rates of progress.

From 2000 to 2008, value stocks greatly outperformed growth stocks and again did so from the bottom of the 2008-9 market to 2016.  Since then, however, growth stocks have led the way by an extraordinary margin, nearly three times as fast as value stocks.

That disparity is unsustainable, which strongly suggests that investors seeking growth should also acknowledge the importance of reasonable underlying value.

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883

203-222-9370

www.soundasset.com

www.soundasset.blogspot.com

Any questions?  Please contact me at nrwayne@soundasset.com

Comments

Post a Comment

Popular posts from this blog

Sound Advice: January 3, 2025

2025 Market Forecasts: Stupidity Taken To An Extreme   If you know anything about stock market performance, you can only gag at the nonsense “esteemed forecasters” are now putting forth about the prospective path of stocks in the year ahead.   Our cousins in the UK would call this rubbish.   I would not be as kind. Leading the Ship of Fools is the forecast from the Chief Investment Strategist at Oppenheimer who is looking for a year-end 2025 level for the Standard & Poor’s Index of 7,100, a whopping 21% increase from the most recent standing.   Indeed, most of these folks are looking for double-digit gains.   Only two expect stocks to weaken. In the last 30 years, the market has risen by more than 20% only 15 times.   The exceptional span during that time was 1996-1999, which accounted for four of those jumps.   What followed in 2000 through 2002 was the polar opposite: 2000:      -9.1% 2001:     -11.9% ...
Post a Comment
Read more

Sound Advice: March 10, 2021

The ABCs of Stock Picking After decades of analyzing stocks (and funds) and investing for clients, I'm happy to share in plain English what's involved, what works, and what doesn't.  Keep in mind the reality that successful stock picking is an effort to maintain a good batting average. In baseball, a batting average of .300 or better is considered quite good.  With stock picking, you need to do better than .600, which means you have many more winners than losers. No one gets it right all of the time.  It's not even close.  Wall Street shops all have their recommended lists and the financial media regularly hawk 10 stocks to buy now. Following that road usually is a direct route to disaster.  Don't be tempted. Let's begin with the big picture: The stock market goes up and down over time, but the long-term trend is up.  When there's a rally under way, everyone feels like a genius.  When the market hits an air pocket, though, with few exception...
Post a Comment
Read more

Sound Advice: January 15, 2025

Why investors shouldn't pay attention to Wall Street forecasts   Investors shouldn't pay attention to Wall Street forecasts for several compelling reasons: Poor accuracy Wall Street forecasts have a terrible track record of accuracy. Studies show that their predictions are often no better than random chance, with accuracy rates as low as 47%   Some prominent analysts even perform worse, with accuracy ratings as low as 35% Consistent overestimation Analysts consistently overestimate earnings growth, predicting 10-12%                 annual growth when the reality is closer to 6%.   This overoptimism can                 lead investors to make overly aggressive bets in the market. Inability to predict unpredictable events The stock market is influenced by numerous unpredictable factors, including geopolitical events, technological changes, and company-specific news.   Anal...
Post a Comment
Read more