This week I was inspired to share some perspective on Value vs. Growth Investing, an Instagram post, and an invitation to attend a webcast hosted by a Nobel Prize-Winning Economist later this month.
Adam Harding, CFP / Smartvestor Pro
Article: Value Judgments - Viewing the Premium's Performance Through History's Lens
When investing, we often look at relative price to evaluate how expensive a stock is compared to its earnings. Traditionally, Value stocks trade at a low relative price and Growth stocks trade at a high relative price. Economists Eugene Fama and Kenneth French (University of Chicago) pioneered research which identified a historical propensity for value stocks to outperform growth (famous investors like Warren Buffett also famously deploy a 'value bias'). However, over the last 10 years this has not been the case.
The graphic below shows the annualized return of both Growth and Value stocks over the last 10 years and also since 1926. As you can see, the last 10 years have been consistent with long run returns for Value stocks, but the 10 year returns of Growth stocks have greatly exceeded their long run average. We know that past performance is not indicative of future returns, but this differential is worth noting.
The theoretical support for value investing is longstanding—paying a lower price means a higher expected return. However, realized returns are volatile. A 10-year negative premium, while not expected, is not unusual
Humans famously chase return, but we don't want to aggressively pursue only what's done well recently. Your mix of Growth and Value stocks should be based on a long term plan.
Everyone needs financial literacy, even if they have trusted individuals serving as advisors.... That's part of the reason I started this weekly series of emails; I hope it's helping build your level of comfort with these concepts.
Webcast: Insights from a Thought Leader with Eugene Fama
Adam Harding, CFP®
Three Things: October 7, 2019
October 07, 2019