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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

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