Since I started in this business (back during the “Hair Era” in my life) certain debates are ongoing. Large-cap versus small-cap, growth versus value, stocks versus bonds and so on. And one of my pet peeves is when people starting pronouncing that “we have a winner” in one of the comparisons.
The latest incarnation is a spate of “Value Investing is Dead” themed articles and reports that I seem to be seeing a lot these days. Rubbish.
Don’t get me wrong, I am not a died-on-the-wool “value guy”. It makes no difference to me whether growth is outperforming value at the moment or vice-versa. But what is most important is to recognize that there is an ongoing ebb and flow between the two disciplines.
The Ebb and Flow of Growth versus Value
For our purposes we will use total monthly return data for the MSCI US Prime Market Growth Index versus the MSCI US Prime Market Value Index. The relative performance of growth versus value since 1992 appears in Figure 1.
When the line in Figure 1 is rising it means that growth is outperforming value and vice versa.
Figure 1 – Relative Strength: Growth Index vs. Value Index; 1992-2017
What do we notice about this chart? Two things come to mind:
1. The line fluctuates. Sometime is goes up (i.e., growth leads) and sometimes it goes down (i.e., value leads)
2. The line has been trending higher of late (i.e., growth has been outperforming value)
When you see an article purporting that “value investing is dead” what it means is that you are supposed to believe that the line in Figure 1 will trend higher from now on in perpetuity and will never turn down again (i.e., growth investing has vanquished value investing once and for all).
Maybe you believe that, but I don’t. Like ying follows yang, some day momentum will shift and value will perform relatively better than growth. Of course, the one thing I can’t say is when this shift will happen. But to think that such a shift will never happen is folly.
Figure 2 displays the same ratio (Growth vs. Value) shown in Figure 1 with a 16-month exponential moving average and a 60-month exponential moving average overlaid.
Figure 2 – Growth/Value Ratio with 16-month and 60-month exponential moving averages
For argument’s sake we will posit that when the 16-month EMA is above the 60-month EMA then growth is leading value and vice versa.
Figure 3 displays:
*The growth of $1,000 split between Growth and Index (red line)
*The growth of $1,000 invested in Growth when the 16-mo EMA in Figure 2 is above the 60-mo EMA, and invested in Value when the 16-mo EMA is below the 60-mo EMA (blue line).
Figure 3 – Growth of $1,000 invested using 16-month/60-month EMA crossovers (blue) versus buying and holding both indexes (red); 1992-2017
Figure 4 displays some comparative results using the simple switching method described above versus splitting money between the two indexes.
Figure 4 – Comparative Results
Summary
This 16/60 method is not presented as a recommended strategy. It is presented simply to illustrate that the there is an ongoing “struggle” between growth and value and that no permanent “winner” will likely ever be declared.
Don’t believe for a minute that value investing is “Dead”. At the same time, don’t ever believe that growth investing is dead. The stock market is like the tide – sometimes the waves come in and sometimes the waves go out. Sometimes waves get so large – or the sea gets so calm – that one can’t imagine it being any different than it is right at the moment.
Those thoughts are always wrong. Prepare instead for the next wave, whenever that may come.
Jay Kaeppel
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
Jay,
Looking at the first graph, I see that in bull markets growth outperforms value and in a bear market, it is the other way around. Not at all surprising. This might be used in conjunction with your other methods that have a good chance of identifying periods when stocks are more likely to rise than fall.
Mark