Our friend Norm always has interesting new links at his Stingy Investor website. (And I am indebted to him for some very good reading links.) Granted he has a very strong value tilt and he sometimes likes to provoke in his posts here (all to the good). The following is one such excellent article.
Some of the text leaves me guessing a bit as to what was said. My hope is that others here may look at this article and we can discuss this article and its financial message.
I think the main message
in John Mauldin's words is: wrote:
This report by James explores value versus growth investing. ... what James finds is that while over time both (value and growth) produce roughly the same returns, picking value winners is easier and comes with less volatility. So while the street wants you to buy the exciting story and high growth name, the safer bet is to stick with value.
Here are some snippets of text from the article ... wrote:
buying cheap stocks did indeed outperform.
There is a strongly consistent value premium across countries/regions.
growth investors shouldn't ignore value. The cheaper the stocks they buy, the better the performance achieved.
So growth stock investing as proxied by buying expensive stocks is all about picking a minority of winners.
It is also worth noting that buying highly valued stocks also carries an enormous ‘torpedo' risk. The worst returns were seen in the high PE stocks with the lowest delivered earnings growth (underperforming by 11.9% p.a. on average!).
analyst forecasts can't tell us very much at all! They certainly can't help us identify growth stocks as a source of significant outperformance.
In general the results show the massive superiority of being a ‘bargain hunter'. Ben Graham's concept of a margin of safety is still sound today. Buying cheap stocks offers significant protection against any potential bad news.
Only in the US does the return on following the analyst's growth forecasts exceed the return from buying cheap stocks. However, the chart below shows the time path of the two portfolios. The impact of the bubble years becomes immediately obvious.
I welcome anyone else interested in this article to comment. Perhaps we can generate some discussion on his methodology and his observations.
If you limit yourself to either Canadian value or Canadian growth stocks you will have very few stocks to choose from at favourable prices. For most individual investors there is, in my opinion, no need to consider the value/growth stock selection process to be mutually exclusive. I have both types of stocks in my portfolio which has consistently beat its benchmark.
in John Mauldin's words is: wrote:
This report by James explores value versus growth investing. ... what James finds is that while over time both (value and growth) produce roughly the same returns, picking value winners is easier and comes with less volatility. So while the street wants you to buy the exciting story and high growth name, the safer bet is to stick with value.
He's wrong there - value stocks have outperformed growth stocks over time, at least in mature markets such as those in North America. There's tons of research on this - e.g. O'Shaughnessy's What Works on Wall Street
He's wrong there - value stocks have outperformed growth stocks over time, at least in mature markets such as those in North America. There's tons of research on this - e.g. O'Shaughnessy's What Works on Wall Street
Let's be fair, it depends on the time period in question. Value can easily underperform growth for several years.
picking value winners is easier and comes with less volatility
This is a fundamentally important point which has been glossed over. When you invest you are compensated for taking on risk. Stocks are riskier than bonds, and so they are cheaper--the same money invested in stocks returns on average a higher return because you are compensated for the risk that you will lose your money.
Here we have someone saying that value stocks have lower risk, but the same return, as growth stocks. (By definition, volatility equals risk.) Given two opportunities both with the exactly same return nobody in their right mind would invest in the higher risk of the two. Ordinarily people arbitrage away any such difference so that in the end any two investments with the same risk have the same return. That value stocks may have a HIGHER return than other investments of the same risk level is referred to as the "value anomoly", and it is one of the cases which have often been cited as evidence that the efficient market hypothesis is not the final word.
[url=http://www.efficientmarket.ca/]Canadian Mutual Fund, ETF, and Self-Directed RRSP Advice[/url]
That value stocks may have a HIGHER return than other investments of the same risk level is referred to as the "value anomoly", and it is one of the cases which have often been cited as evidence that the efficient market hypothesis is not the final word.
Darn that empirical evidence for ruining a good theory
Pardon me while I go off and mine that 'anomaly' which has been documented since Graham's time back in the 1930s. It sure has been around for a while
jiHymas wrote:He's wrong there - value stocks have outperformed growth stocks over time, at least in mature markets such as those in North America. There's tons of research on this - e.g. O'Shaughnessy's What Works on Wall Street
Montier makes a number of statements in the article that are not fully explained or qualified. I presume he was referring to the 1988-2004 time period - as
below the second to last graph he writes:
The US value and growth portfolios have actually generated very similar returns. The value portfolio has a CAGR of 13.7%, and the high forecast growth portfolio has a CAGR of 14.0% since 1988. Effectively there has been little to choose between the two strategies. Although it should be noted that the value portfolio has a markedly lower standard deviation of returns (17.7% for the value portfolio, against 25.1% from the growth portfolio). Thus on a risk adjusted measure value would have significantly outperformed growth. So much for value stocks being riskier!
Certainly overall his claim is that the deeper the "value", the better the average return - as seen in his first table for the MSCI index universe.
At first blush this seems like a very compelling chart. Look at the first line. It says that if we had selected all stocks with the PE ratio in the lowest 20% (simple enough?), you would have gained an extra 9.7% return over the market average. Incredible! But how statistically significant is this. I don't know and the author does not say.
What is also revealing in that first line of numbers (-3.0, 2.3, 9.0, 14.1, 26.2) is very monotonic -- and consistent with the subsequent earnings growth numbers. Likewise for the consistency of the last vertical column (26.2, 11.9, 8.4, 9.0, 1.0)
Methinks one should try and read more from James Montier.
What is also revealing in that first line of numbers (-3.0, 2.3, 9.0, 14.1, 26.2) is very monotonic -- and consistent with the subsequent earnings growth numbers. Likewise for the consistency of the last vertical column (26.2, 11.9, 8.4, 9.0, 1.0)
What is also revealing in that first line of numbers (-3.0, 2.3, 9.0, 14.1, 26.2) is very monotonic -- and consistent with the subsequent earnings growth numbers. Likewise for the consistency of the last vertical column (26.2, 11.9, 8.4, 9.0, 1.0)
Norm: Am I correct on the following? The two studies are quite different. (Not sure what you mean by consistent?)
The Montier study says if you select on low PE (current and past) you are likely to get better than average earnings growth (in future) and outperform the market going forward. (Past value begets future growth.)
The Tweedy Browne study says that if you select on past high earnings growth rate, you are not likely to see same going forward. (Past growth does not beget future growth.)
Disclaimer. Bear in mind both studies were made over a specific time interval. There is no assurance this will be true in other time intervals - no assurance that it is universal truth. (Or is there? )
Jason (Rowski) posted this link on another thread but it seemed to me that I would try and gather a number of such value related items on this thread as well. (It also helps keep it in sight.)
Vinvesting.com is a free website for value investors where you can get the latest investment ideas, insights and interviews from great investors like Warren Buffett, Templeton etc.
It is possible to find stocks with both value and growth, but these are often smaller, thinly traded companies.
I always start by looking at the earnings reports. If earnings are growing, I go the Globe web site and look at the last 3 years, if there is steady growth, I then look at the P/E and see if the growth has been priced into the stock. Then I take at a look at debt to equity ratios, avoiding companies with high debt.
This fairly simple approach has found me some real bargains over the years. The best ever was HCG which I bought five years ago at $3 and has risen steadily to $66 (allowing for a 2:1 split), with consistent quarter over quarter growth in earnings. I am hoping for a similar performance from XMC which is a relatively new company in the same business.
Recent picks using this method have been:
HF (good potential, but extra risk because it is based in China) up 40%
CWX recently converted to a trust - up 150%
SIC - not much movement yet
VH - up 20%
SOY - down 20%, very volatile, I am hanging on and waiting for another up turn in this one
I always find the decision to buy relatively easy, but it is really difficult to make the sell decision. I sold my CWX on news of the trust conversion, missed the top by a couple of dollars.
Jacko posted the following link on another thread. I'm repeating it here to try and focus (for the time being) our value discussion on one thread - and to bring this thread to the top.
LONDON, 18 April 2005 — To start, quality stocks are synonymous with value stocks. They exhibit consistent sales growth, a good record of earnings and dividend growth, relatively low gearing, and disciplined capital investments in projects that deliver returns above the cost of funds.
“Value stocks are valued by value investors!” A wise approach would be to simply strike the right balance between risk and reward. Stocks, of course, offer the best chance to earn high returns over time. As the global economy grows, corporate profits rise. That drives share prices higher and allows companies to pay fatter dividends.
But stocks are also a dicey endeavor. Think about the huge losses suffered by technology-stock investors over the past years and by holders of Japanese shares during the 1990s. To avoid such disasters, an investor should diversify into quality/value stocks across a load of different companies, sectors and countries.
Of the many intellectual advances Graham delivered, we'd like to highlight three. Graham was one of the first to distinguish the value of a business from its price in the market. From this, Graham's corollary was that the price an investor paid for a security determined that investor's return. Graham also recognized that valuing securities was inherently difficult and racked with uncertainty--which was undoubtedly more so in his era, which predated computers and modern accounting standards--and concluded that investors should only purchase securities when a margin of safety was available. Or in other words, Graham was the first analyst to realize that the odds of attractive investment returns could be greatly improved by accurately valuing securities, and then only investing when an ownership interest could be acquired at a discount to the underlying fair value of the business.
But what makes Graham's contributions to our profession all the more remarkable is that
they have yet to be superceded, a stark contrast to other bodies of knowledge, in which early contributions are substantially refined or disproven;
they span an impressively diverse range of topics and include several translations of foreign works,
and they fostered remarkable long-run investment results among the many investors who applied Graham's ideas.
I find the definitions of value and growth to be extremely limiting in the process of stock selection. Does MRK or DRL go from being a growth stock to being a value stock because the price falls out of bed?
I'd much rather start by asking what I want in a stock. I want increasing earnings. I want smooth earnings. I want a strong balance sheet. If I start with a stock database of +7K North American securities, selecting securities whose 5 yr earnings growth is greater than their 10 yr earnings growth, reduces the possibilities to 5950. Looking for smooth earnings by stipulating an 10 yr earnings growth rate R-squared greater than .9 reduces the possibilities to 345. Requiring a debt/capital ratio less than 50% reduces the possibilities to 111. Because I want sustainable growing income, adding a yield requirement greater than 0, a payout ratio less than 50% and dividend growth greater than 0, reduces the possibilities to 92, 88 and 78 respectively.
S&P does the same thing when it assigns its Earnings/Dividend Quality rankings. Currently there are around 80 stocks with an A+ ranking.
ISTM that looking for these kinds of stocks and buying them when they are historically cheap will given exceptional returns for lower risk. You don't have the value risk of differentiating between a company with permanent and/or long-term problems or the growth risk of paying too much for growth.
Yielder wrote:I find the definitions of value and growth to be extremely limiting in the process of stock selection. ....
I recall reading words with a similar view from Warren Buffet and Charlie Munger - who believe that the simply dividing stocks into two camps, "growth" and "value", by some mathematical criteria is silly - real value knows no such boundaries.
Does anyone recall which article of theirs stated this? Link?
George$ wrote:Does anyone recall which article of theirs stated this? Link?
I certainly recall the quote. It's been used many times in reference to both Buffett and Munger. I believe it goes something like: "There is no value without growth." Based on the number of times I've seen this quoted, I'd hazard to guess that this memorable quote was found in a BRK letter to shareholders.
Sorry I can't provide a link. You could try a Google search.
Scott
"On what principle is it, that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?"
Thomas Babington Macaulay in 1830
David Dreman does another Value/Growth comparison in 4/18 Forbes.
Consider the last 15 years, which gives us two bear markets, a bull market and whatever you call today's climate.
...
We compared the 100 [of 500] Compustat stocks with the lowest price/earnings ratios (that is, the purest value stocks) to the 100 with the highest earnings multiples (the purest growth). The portfolios were rebalanced annually. Stocks with losses were omitted. We used earnings before nonrecurring items. If you invested $10,000 in the low P/E group in 1990, it grew to $77,900 (including dividends), a return of 14.7% annually. The same amount invested in the highest P/E quintile rose to $34,700, or 8.6% yearly. The overall Compustat 500 index did 10.3%.
...
Another value-versus-growth gauge shows value the superior bet, too, albeit much more narrowly. For the 1990-2004 period the S&P Barra Value Index logged a 10.7% annual return, 0.3 percentage points better than the S&P Barra Growth Index. I'm not a fan of this method because, among other things, it simply slices the S&P 500 in two, assigning market-cap-weighted amounts of each stock to each subindex according to its flavor. My experiment focused more on the extremes. Still, even the watered-down Barra comparison makes the point.
Berkshire's 2001 annual meeting (see Fool's notes ) mentions growth vs value.
Anybuddy care to define Growth and Value?
If'n you think it depends upon Book-to-Price ratios, then there's a bunch of historical data here to play with:
NormR wrote:
Potentially dangerous, smooth earnings can be a sign of manipulation by management.
Yep but it's still a reasonable criteria to use when you're screening a database to identify candidates. Then the research starts to evaluate the quality of earnings among other things.
Interesting read from this week's NY Times Magazine (freebie, but registration required, articles usually remains free for about 1 week). While the article is profiling a Hedgie, it touches on value vs. growth.
published in 1992, under the unassuming title of ''The Cross Section of Expected Stock Returns,'' it created something of a sensation. It essentially showed that if you took a large, diverse portfolio of value stocks, which are cheap, and put it next to an equally large, equally diverse portfolio of growth stocks, which are expensive, the value stocks would outperform the growth stocks more than the efficient-market hypothesis suggested they should. Asness describes the results of that paper: ''Cheap beats expensive more than it should.''