What’s Your Prior?

Value investing vs growth investing; of the two, you are probably more familiar with the Value approach. Value investing is the tried and true investment strategy of buying stocks that the markets (temporarily) prices below their intrinsic worth, but this approach has not done well over the past five years. Why? 

Growth investing, on the other hand, is a newer strategy and has been on a tear in the US equity market over the past few years, possibly due to the high demand among investors and cheaper money from central banks’ quantitative easing. Is there any reason to believe it will slow down? 

I explore these questions with special guests Tim Rudderow, co-founder, CEO and Chief Investment Officer of Mount Lucas management and his partner and co-portfolio manager, David Aspell, in episode 2 of the new Style Analytics podcast ‘What’s Your Prior?

Value investing, despite its history as a solid investment strategy, has been one of the worst-performing investment strategies over the past few years. To put this into context, value investing should thrive in market recoveries, but it has been the single ‘worst strategy’ during the post-COVID rally. So, the question on any curious investor’s lips right now is ‘why?’ Tim Rudderow explains; ‘the value in value stocks is the money they make now’. For value stocks, the ‘now’ is important and in a crisis like COVID, the ‘now’ isn’t doing so well, so neither are value stocks. An example Tim and Dave use to explain this phenomenon is airline stocks like ‘Delta’ and restaurant chains like ‘Brinker International.’ These value stocks have been crushed by the COVID market because the market is acting as if plane journeys and dining out is a thing of the past due to lockdowns, travel restrictions and stay-at-home measures.

What about Growth stocks? Why are they doing so well and will their growth continue? Growth stocks thrive in low-interest-rate environments and we’ve been living through a long period of low-interest rates. Dave Aspell explains that growth stocks have done incredibly well over recent years in executing their businesses without ‘hitting too many potholes’, and they’ve been successfully reinvesting the cash plays at high return rates and large size. An interesting point Aspell raises in his explanation is that they’ve also ‘morphed their business into more subscription type revenue streams that are almost taxing oligopolies’. This point is elaborated on in the full podcast but here’s a snapshot; tax-like revenue streams of big tech companies, coupled with a lax regulatory environment has meant these companies can dominate the stock market and that revenue growth matters more than earnings. So, if growth, albeit unprofitable, is key to a high stock price; ‘an artificially low-interest-rate environment, along with little enforcement of anti-competitive behavior’, means growth stocks will continue to grow.

I end this episode with asking each of my guests what it would take for them to change their minds about how and when value stocks might stage a comeback, and whether it’s smart to put our money on value investing? Tune in to hear their answers and listen to the full conversation on value investing, growth investing and the future of both.

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