February 25, 2020Individual Investment Management

From 1959 to 1978, the S&P 500 index compounded at 4.3% annually.  Over the next 20 years, it compounded at 17.7% annually.  For bond investors over the same time frames, long-term government bonds compounded at 3.4% annually and 11.1% annually.  This has often led investors to question the validity of using past returns to predict future results in the area of growth investments.  Enter the value investor!

Growth vs. Value Investing
The concept of "value investing" is quite simple - screen and select investments that appear to be trading for less than their intrinsic value relative to earnings.  As a group, value investments tend to be larger, more established companies that also tend to pay higher dividends and are more economically mature.  This can be considered the near opposite of growth investments which use more of their cash flow to grow operations and tend to be smaller in nature.  So why would an investor own value vs. growth?

The opportunity in value:
Performance since 1995 has been clearly in favor of growth for a number of reasons.  The tech revolution, big data, enterprise computing, the spread of markets across the globe - all have contributed to growth's outperformance.  The charts below illustrate this performance:

Calling market turning points is always difficult, but there seems to be a case in today's market that value is once again an attractive opportunity.  Investors seem to be reevaluating the premium they are willing to pay for growth stocks - this is similar to market turning points we have witnessed as recently as 1999.