Author Topic: Value vs Growth  (Read 7602 times)

pka222

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Value vs Growth
« on: July 25, 2012, 04:02:59 PM »
Here is a basic question that I'm sure you mustache wearing experts can set me straight on.

It seems that in the growth spurt from 2002 to 2007 vanguard value indexes clearly out preformed vanguard growth indexes while the recovery from 2009 to present Growth has out preformed value. 
Both the small cap index and the whole market indexes mirror this trend.
Q1) why is that? I mean why would one bull run be dominated by value while the next by growth?
Q2) Are there longer term trends that show this repeating over time?
Thanks for your insight
Cheers


smedleyb

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Re: Value vs Growth
« Reply #1 on: July 25, 2012, 04:33:55 PM »
One word:  Apple.

pka222

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Re: Value vs Growth
« Reply #2 on: July 25, 2012, 04:59:15 PM »
smedleyb- could apple really account for that difference?
Following that logic, baring another apple, you'd thing value would out preform growth over long time spans?

tooqk4u22

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Re: Value vs Growth
« Reply #3 on: July 26, 2012, 06:59:05 AM »
smedleyb- could apple really account for that difference?
Following that logic, baring another apple, you'd thing value would out preform growth over long time spans?


I can't say for sure regarding the specific funds and it would really only come into play for the second half of the chart because that is when Apple took off.  What I can say is I looked at QQQ and SPY earlier in the year and I think the market was up for the year - at that time I calculated that if you strippped out apple the indexes overall would have been down for the year.  Apple is that important. It is actually easy to figure out - all the indexes/funds show their holds and weighting so you extropolate the data for apple and over any time frame.


Kriegsspiel

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Re: Value vs Growth
« Reply #4 on: July 26, 2012, 08:33:49 AM »
Maybe someone with a better understanding of business can chime in, but isn't this just the standard business-cycle way of the world?  Companies innovate and do new things (growth investing), then the bigger companies figure out how to best profit from the new technologies (value investing)?

tooqk4u22

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Re: Value vs Growth
« Reply #5 on: July 26, 2012, 10:25:47 AM »
Maybe someone with a better understanding of business can chime in, but isn't this just the standard business-cycle way of the world?  Companies innovate and do new things (growth investing), then the bigger companies figure out how to best profit from the new technologies (value investing)?

Your kind of right on the growth more so because that's what is going on.  There are many ways to define growth but basically they are companie that are established and are experiencing or are expected to experience growth rates that are above average for the broader market. So if the net income of the broader market is growing at 7% growth stocks would be expected to well surpass this. 

What you are defining as value is actually a mature company, which is when growth slows and is more stable, income growth is driven by modest inovation, increased market share, and expense control.  This is usually when companies begin to pay out dividends. 

Value is companies that are undervalued relative to their peers and is based on the fundamentals of any particular company - P/E, PEG, Leverage, Book Value, whatever.  Many on this site believe that markets are efficient and information is instant so it is not possible for a value to exist, I don't agree with this, but if that were true then investing in a value oriented fund would not make sense.


smedleyb

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Re: Value vs Growth
« Reply #6 on: July 26, 2012, 03:14:14 PM »
Maybe someone with a better understanding of business can chime in, but isn't this just the standard business-cycle way of the world?  Companies innovate and do new things (growth investing), then the bigger companies figure out how to best profit from the new technologies (value investing)?

My guess would be that "value investing" came into vogue after the dot-com bubble collapse as a means of decreasing volatility in one's portfolio and to increase dividend payments (growth stocks rarely pay dividends), so this sector did quite well right into the 2007 market top.

The second cyclical bull that pka222 refers to is simply Apple's run to becoming the most richly valued (at least top 2) corporation on the planet.  Extract AAPL from the equation and I bet value beats growth again.

Mr Mark

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Re: Value vs Growth
« Reply #7 on: July 26, 2012, 08:05:57 PM »
Good point about apple. Via my indexes, i,I've had the benefits of owning them, but they have dominated a heap of metrics on a lot of ways of looking at the whole market.

I'm a fan of cash flow being the best source of investment return.

Jamesqf

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Re: Value vs Growth
« Reply #8 on: July 27, 2012, 12:30:18 PM »
Many on this site believe that markets are efficient and information is instant so it is not possible for a value to exist, I don't agree with this, but if that were true then investing in a value oriented fund would not make sense.

Why not?  Worst case, if markets are perfectly efficient and those "value" companies are at their correct price, you've still got stocks paying decent dividends over time.

Further, we've had absolute proof that markets are not anywhere near efficient, and that they are sometimes (often) psychological factors drive particular stock, classes of stocks, or even the whole market, into a bubble mentality.

tooqk4u22

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Re: Value vs Growth
« Reply #9 on: July 27, 2012, 12:42:52 PM »
Many on this site believe that markets are efficient and information is instant so it is not possible for a value to exist, I don't agree with this, but if that were true then investing in a value oriented fund would not make sense.

Why not?  Worst case, if markets are perfectly efficient and those "value" companies are at their correct price, you've still got stocks paying decent dividends over time.

Further, we've had absolute proof that markets are not anywhere near efficient, and that they are sometimes (often) psychological factors drive particular stock, classes of stocks, or even the whole market, into a bubble mentality.

You and I are on the same page, as I said in my post I don't agree with the premise. It just seems that the majority of posters, and generally for good reason, dispell anything but broad index investing.  I think there are values/opportunities but it is not easy and does increase risk.

arebelspy

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Re: Value vs Growth
« Reply #10 on: July 27, 2012, 03:22:30 PM »
Further, we've had absolute proof that markets are not anywhere near efficient, and that they are sometimes (often) psychological factors drive particular stock, classes of stocks, or even the whole market, into a bubble mentality.

That doesn't make markets inefficient.

I agree, there are definitely psychological factors that drive stocks and the market.

Can one individually beat the market due to that, taking into account trade costs, by "outguessing" the market consistently?  No, I don't believe so.

I'm not sure you understand what an efficient market is though.
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Mr Mark

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Re: Value vs Growth
« Reply #11 on: July 27, 2012, 06:53:14 PM »
Many on this site believe that markets are efficient and information is instant so it is not possible for a value to exist, I don't agree with this, but if that were true then investing in a value oriented fund would not make sense.

Why not?  Worst case, if markets are perfectly efficient and those "value" companies are at their correct price, you've still got stocks paying decent dividends over time.

Further, we've had absolute proof that markets are not anywhere near efficient, and that they are sometimes (often) psychological factors drive particular stock, classes of stocks, or even the whole market, into a bubble mentality.

You and I are on the same page, as I said in my post I don't agree with the premise. It just seems that the majority of posters, and generally for good reason, dispell anything but broad index investing.  I think there are values/opportunities but it is not easy and does increase risk.


'It just seems that the majority of posters, and generally for good reason,"

Yes, ...

' dispell anything but broad index investing. '

No, I disagree. MMM advises rental property, owning your own house, and broad index investing. And no debt (except a 30 yr mortgage perhaps) .  And the rest of us opinionated ones generally allow some degree of active funds (if low fee), bonds, dividend stocks, diversified asset allocation, efficient long  and short term tax planning, ... heck, I'd allow a 5% speculative allocation.

'I think there are values/opportunities .. "
Me too. Based on broad global trends and common sense. Or hyper-local conditions, like rentals and property development. As per MMM.


'but it is not easy and does increase risk."
Exactly. In fact, it is well proven that most professional market traders do not beat the market, and the odds of beating it consistently
over 10+ years is very very low. Which is why we are generally not fans of short term trading. You are highly likely to end up under-performing the market, while increasing volatility and having to fret about the market. For ever. All the time.


Jamesqf

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Re: Value vs Growth
« Reply #12 on: July 27, 2012, 11:21:48 PM »
Can one individually beat the market due to that, taking into account trade costs, by "outguessing" the market consistently?  No, I don't believe so.

First, I'm not talking about guessing, but about using a consistent strategy to decide which stocks to buy and sell.  I don't claim any great expertise (and I haven't traded individual stocks in 20 years or more), but I see that what I have in my value funds tends to outperform the index funds over time.

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I'm not sure you understand what an efficient market is though.

Nor am I sure, but at least I know that I may not know :-)  But as best I can put it in a few words, an efficient market is one in which prices reflect available information, so that there are no bargains.  But if that were the case, why would a market index be worth $X one day, and 3/4 of that a few days later?  There are no significant changes in the companies whose stock makes up the index, or the information available.  The difference must be due to psychology: stock prices are bid up far over their true value due to "irrational exuberance", then crash due to an equally irrational pessimism.

arebelspy

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Re: Value vs Growth
« Reply #13 on: July 28, 2012, 08:29:14 AM »
Nor am I sure, but at least I know that I may not know :-)  But as best I can put it in a few words, an efficient market is one in which prices reflect available information, so that there are no bargains.  But if that were the case, why would a market index be worth $X one day, and 3/4 of that a few days later?  There are no significant changes in the companies whose stock makes up the index, or the information available.  The difference must be due to psychology: stock prices are bid up far over their true value due to "irrational exuberance", then crash due to an equally irrational pessimism.

Yes, your argument is (at least) decades old.  I'm first familiar with its use because of Black Monday in 1987.  The problem is that you seem you seem to be equating "rational" and "efficient".  They aren't the same though.  You aren't arguing that the market isn't efficient, you're arguing it isn't always rational.  I agree.  But it still can be efficient (to the point that one can't reliably exploit these irrationalities).

From page 58 of this PDF: http://www.investorsolutions.com/uploads/pdf/Investment_Strategies_21st.pdf

Quote
Detractors of the efficient market theory point to the often-strange behavior of markets. For instance, they argue that the market couldn't have been right both before and after the crash of 1987, when we lost 500 points in one day. They miss the point. Nobody is saying that the market is always right, or even rational. The real point is that if markets are efficient, it is very unlikely that you, or anybody else, will be able to consistently "beat" the market.

(Emphasis mine.)

That whole document is worth a read, IMO.
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Jamesqf

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Re: Value vs Growth
« Reply #14 on: July 28, 2012, 11:00:42 PM »
You aren't arguing that the market isn't efficient, you're arguing it isn't always rational.  I agree.  But it still can be efficient (to the point that one can't reliably exploit these irrationalities).

Err... And why not?  I certainly have exploited them, beginning back in '87, when I first started investing by putting most of the money I had in a savings account into stocks in the weeks after the crash.  And as I said, the value investment funds I hold seem to do better in the long term than anything else.

Or if we look at the housing market, I managd to miss the irrational upgrade/home equity loan cycle.  Bought before prices really started to ramp up (with a large downpayment from cashing in stock funds before the tech bubble burst), only refinanced to get a lower interest rate.  So whether the behavior is lack of efficiency or irrationality, it certainly seems possible to take advantage of it.

Lars

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Re: Value vs Growth
« Reply #15 on: July 30, 2012, 12:00:57 AM »
Jamesqf

 I would strongly recommend you cast a critical eye at your investment successes. Based on the research I've read, it is extremely easy to overestimate your skill in exploiting these matters. Reasons:

- We tend to attribute success to skill and a failure to minor, one time errors and the like. Over time, we believe our ratio of successes to failures is higher than it actually was.

- We don't perform adequate back testing to see if what we did was really better than a buy and hold strategy. Instead we generally believe if it did really well it must be good.

- In complex systems with lots of people, even one with with outcomes that are heavily random, a significant number of people are going to do much better than average. Were such a system to exist in the real world those who did much better than average would almost certainly attribute to their success to skill what actually came from luck. Of course, such a system would never exist in the real world. ;-)

arebelspy

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Re: Value vs Growth
« Reply #16 on: July 30, 2012, 08:23:37 AM »
To add to Lars final point: If a million people flipped coins 10 times, and tails is losing, ~976 would get 10 heads in a row due to the law of large numbers.

But there certainly isn't any skill in that, although they did way outperform the average.

(Could any of them reliably duplicate it though?)
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grantmeaname

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Re: Value vs Growth
« Reply #17 on: July 30, 2012, 09:39:25 AM »
Could any of them reliably duplicate it though?
It's trivially easy. You just wait until the head and shoulders is fully lathered to short.