Similarly to what happened in the dotcom bubble of the early 2000’s. Many investors are asking themselves the same question – Is value investing dead? The recent performance of tech and growth stocks, has completely overshadowed value stocks. It’s incredibly interesting to analyze how Buffet’s ability was questioned with such persistency. In the 2000’s Berkshire’s relative underperformance led many to question if the legendary investor was out of touch. The same also happened in 2008. Today the same headlines are coming out. From Morningstar to Financial Times, many seem to question his ability yet once again. One could argue that such headlines could be a signal that a crash is impending. Given what happened in the past.
Value Stocks vs Growth Stocks
Value stocks have outperformed relative to growth stocks in the past. But that does not mean that the same will eventually happen in the future. As past performance does not guarantee the future will be the same.
Relative performance of US value vs growth
Source: Fama French, J.P. Morgan Asset Management
According to the Bank of America, since 1926 value investing has returned 1,344,600%. During the same time growth investing has only returned a meager 626,600%, roughly half of the returns. Investors are more enticed to invest in growth stocks with virtually no earnings. Similarly to what happened in the dotcom bubble. Many unicorn companies without any earnings and a clear path to profitability are going public.
US initial public offerings with negative earnings
Source: Pitchbook, Jay Ritter, University of Florida, J.P. Morgan Asset Management
The low interest rate environment in which we find ourselves in. Has been the single biggest contributor for this. With unlimited liquidity in the market, it becomes fairly easy for unprofitable companies to finance and refinance. Since instead of servicing the debt, companies can easily issue more bonds or ask for cheap credit. They can go on losing money for a long time, without the consequences being felt on their financials.
Low interest rates have been helping unprofitable and inefficient companies stay in business. Eventually, when interest rates rise, or we face a liquidity crisis. We will witness a change from growth stocks, to value stocks. Until one of these two scenarios happens, we will continue to see growth stocks outperforming value stocks.
So Is Value Investing Dead?
The answer is that it is not dead but it might seem like it is dying. Investors tend to focus on short-term performance and for that reason, value stocks are being overlooked right now. Both in the US and internationally. Investors should not focus entirely on growth or value stocks. They should instead, focus on the business behind the stock and how well it is doing. This will ensure that they buy the stock based solely on the business performance and not on price action.
When the price of your stocks goes down, it is important to know the narrative that justifies your purchase. This way you will avoid rushing into selling, because you know the underlying business is doing just fine. Investors focused on short-term price action, are the first ones to feel the pressure and give into selling. Focus on what you know, and analyze companies and you should do just fine in the stock market. Don’t follow the crowd and do your due diligence.
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