Growth vs value

Andrew Hallam
20.01.2020

Why Your Fast & Furious Stocks Might Be Putting You At Risk
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Imagine two racing cars. One is called Growth. The other is called Value. They have been racing each other around the same giant track for more than 100 years. Sometimes, Growth records faster lap times. Other days, Value circles the track far faster than Growth. But Value is usually the faster car. That’s why it adds to its lead roughly 8 out of every 10 decades. As a result, it’s thousands of miles ahead.

But when Growth runs well, people often bet in droves. They say, “This time it’s different. Growth will now always win.” But when almost everyone believes in a turning of the guard, Value kicks into gear to increase its long-term lead.

I’m really talking about growth and value stocks. A growth stock is one that’s rapidly increasing its business profits. It’s a stock like Facebook, Alphabet (Google) and Tesla. Unfortunately, when growth stocks are popular, their stock prices rise far faster than their business earnings. Eventually, that always spells trouble. It’s like a racing car’s pit crew forcing more air into the tires after every fast lap. That’s what’s happening with growth stocks now.

Their business profits are growing. But their stock prices are rising far faster than business profits. At some point, those prices are going to burst.

In contrast, value stocks are boring. Sometimes, their stock prices rise slower than their business earnings. The longer this happens, the bigger the reward for patient value stock investors. Today, growth stocks are in vogue. They have beaten value stocks for more than 10 years. But value always roars back. Below, I’ve listed the decades when value beat growth and when growth beat value.

When examining the past 83 rolling 10-year periods, value beat growth about 82 percent of the time.

 

Growth Versus Value: Which Won and When?

DecadeWinnerWhat Did People Say?
1928-1937Growth"This time it's different.
Growth will now always win."
1929-1938Growth"This time it's different.
Growth will now always win."
1930-1939Growth"This time it's different.
Growth will now always win."
1931-1940Growth"This time it's different.
Growth will now always win."
1932-1941Value 
1933-1942Value 
1934-1943Value 
1935-1944Value 
1936-1945Value 
1937-1946Value 
1938-1947Value 
1939-1948Value 
1940-1949Value 
1941-1950Value 
1942-1951Value 
1943-1952Value 
1944-1953Value 
1945-1954Value 
1946-1955Value 
1947-1956Value 
1948-1957Value 
1949-1958Value 
1950-1959Value 
1951-1960Value 
1952-1961Value 
1953-1962Value 
1954-1963Value 
1955-1964Value 
1956-1965Value 
1957-1966Value 
1958-1967Value 
1959-1968Value 
1960-1969Value 
1961-1970Value 
1962-1971Value 
1963-1972Value 
1964-1973Value 
1965-1974Value 
1966-1975Value 
1967-1976Value 
1968-1977Value 
1969-1978Value 
1970-1979Value 
1971-1980Value 
1972-1981Value 
1973-1982Value 
1974-1983Value 
1975-1984Value 
1976-1985Value 
1977-1986Value 
1978-1987Value 
1979-1988Value 
1980-1989Value 
1981-1990Value 
1982-1991Value 
1983-1992Value 
1984-1993Value 
1985-1994Value 
1986-1995Value 
1987-1996Value 
1988-1997Value 
1989-1998Growth"This time it's different.
Growth will now always win."
1990-1999Growth"This time it's different.
Growth will now always win."
1991-2000Value 
1992-2001Value 
1993-2002Value 
1994-2003Value 
1995-2004Value 
1996-2005Value 
1997-2006Value 
1998-2007Value 
1999-2008Value 
2000-2009Value 
2001-2010Value 
2002-2011Growth"This time it's different.
Growth will now always win."
2003-2012Growth"This time it's different.
Growth will now always win."
2004-2013Growth"This time it's different.
Growth will now always win."
2005-2014Growth"This time it's different.
Growth will now always win."
2006-2015Growth"This time it's different.
Growth will now always win."
2007-2016Growth"This time it's different.
Growth will now always win."
2008-2017Growth"This time it's different.
Growth will now always win."
2009-2018Growth"This time it's different.
Growth will now always win."
2010-2019*Growth"This time it's different.
Growth will now always win."

*To October 31, 2019
Source: Dimensional Fund Advisors, portfoliovisualizer.com

Growth stocks are racing. But that doesn’t mean value stocks are running on flat tires. According to Vanguard, U.S. value stocks gained 11.07 percent over the past 12 months, ending November 30, 2019. They also averaged compound annual returns of 11.69 percent, 9.57 percent and 12.37 percent over the past 3, 5 and 10-year periods.

In other words, if somebody invested $10,000 in U.S. value stocks on November 30, 2009, it would have grown to almost $33,000 ten years later. That’s a compound annual return of 12.37 percent. It’s far higher than the long-term average return for growth and value stocks.

But U.S. growth stocks, by comparison, have raced on nitrate fuel. Over the past 1, 3, 5 and 10-year periods, they averaged compound annual returns of 21.7 percent, 18.49 percent, 12.33 percent and 14.69 percent respectively. If somebody invested $10,000 in U.S. growth stocks on November 30, 2009, it would have ballooned to about $39,300 ten years later.

Growth stocks’ price-to-earnings ratios continue to increase. That puts them in a danger-zone, much like a car with over-inflated tires. If stocks soon fall hard, overpriced stocks (as always) will lead the downward plunge.

It’s tough not to buy growth stocks (or growth stock index funds) when they’re scorching around the track. But investors should remember several important rules:

1. Maintain a diversified portfolio of low-cost index funds.

2. If the portfolio includes a growth stock index, make sure it includes a value stock index too (a total stock market index would include both).

3. Make sure the portfolio includes exposure to international stocks.

4. Include a bond market index, based on your tolerance for risk. Higher bond allocations bring lower long-term returns. But bonds add stability when stocks crash.

Too many investors, unfortunately, chase past performance. In many cases, they’re breaking sound investment rules to stockpile money in America’s fastest growing stocks. But when their racetrack turns to ice or those tires decide to burst, these are the drivers who will pay the highest price.

 

Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas

 

Internaxx Bank S.A. accepts no responsibility for the content of this report and makes no warranty as to its accuracy of completeness. This report is not intended to be financial advice, or a recommendation for any investment or investment strategy. The information is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Opinions expressed are those of the author, not Internaxx Bank and Internaxx Bank accepts no liability for any loss caused by the use of this information. This report contains information produced by a third party that has been remunerated by Internaxx Bank.

Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.


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