By Brett Arends, MarketWatch
If you’re an active value investor, or you’re just holding retirement money in a “value” stock mutual fund, well…. It sucks.
You’ve lost about a fifth of your money so far this year, while competing “growth” funds are nearly even stevens. The market losses of 2020 are almost all on the “value” side of the ledger. Big headline growth stocks, like Amazon /zigman2/quotes/210331248/composite AMZN -1.99% , Facebook /zigman2/quotes/205064656/composite FB +0.71% , Netflix /zigman2/quotes/202353025/composite NFLX -0.60% and Google /zigman2/quotes/205453964/composite GOOG -1.48% , are either hitting new highs or nearing them.
And that adds insults to a lot of injury. Value investing has been lagging growth investing since the financial crisis of 2008-9.
Last decade the index of S&P 500 /zigman2/quotes/210599714/realtime SPX -0.39% growth stocks /zigman2/quotes/209170287/composite VUG -1.31% beat its value /zigman2/quotes/209486178/composite VTV +0.33% by about 70 full percentage points in total. Ouch.
Value investing is now so out of fashion that Charles de Vaulx, one of the best value investors around, has opened his funds again to new clients . When he launched IVA Worldwide /zigman2/quotes/200320416/realtime IVWAX -1.45% and IVA International /zigman2/quotes/204165163/realtime IVIOX +1.25% at the end of 2008 he was fighting them off with a stick.
Value and Growth investing are the Montague and Capulets of the stock market. Value investors—to oversimplify — like to buy things that are certain. They buy stocks that are cheap compared with today’s fundamentals: Current cash value, present asset values, current dividends. Where possible they like to buy stocks that are so cheap that things can even go wrong and they’ll get their money back in the end.
That typically means investing in boring but established companies.
Growth investors, on the other hand, are willing to gamble on the uncertainties of the future. They buy what they hope will be the companies of tomorrow, and the day after tomorrow. And they’re willing to pay high—sometimes sky high—prices for the privilege.
You might reasonably argue that companies such as Amazon and Netflix are the companies of today as well as tomorrow, and have terrific fundamentals. But the risk “growth” investors take is that they pay a lot extra for that growth.
Amazon stock currently sells for 112 times last year’s per-share earnings: You’re paying $112 for each dollar of after-tax profit the company made last year. So someone buying Amazon stock here isn’t just betting that Amazon will be great today but that it will be even greater tomorrow.
Meanwhile Verizon Communications /zigman2/quotes/204980236/composite VZ +1.78% , one of the top “value” stocks in the market, sells for just 12 times last year’s earnings, or barely one-tenth as much. Someone buying Verizon isn’t taking a big gamble on future growth. They’re happy with what they own right now. Verizon stock currently pays a 4.5% dividend yield.
The divide between value and growth is an old one. Benjamin Graham is generally thought of as the father of value investing: He got hosed in the crash of ’29, and thereafter made it a rule only to buy stocks that were so cheap compared with fundamentals he had a wide “margin of safety” in case things went wrong.
Philip Fisher, author of the 1950s classic Common Stocks and Uncommon Profits , is among the most famous apostles of growth investing. He argued that the key to making big money was to find great long-term growth companies, buy them and then pretty much hang on forever.
Who is right? Well, both, presumably. It just depends on how much you pay for the stocks. Warren Buffett, notably, says he’s been influenced by both Graham and Fisher (Although his investment company, Berkshire Hathaway /zigman2/quotes/200060694/composite BRK.B -0.34% , is now a big component of the U.S. “value” index.)
The dismal performance of so-called “value” since the financial crisis has produced a new wave of soul-searching among investors and academics.