- The value factor seeks to profit by investing in stocks of solid companies that are out-of-favor, and therefore represent a good value.
- The growth factor seeks to outperform by targeting companies from whom expectations are high and whose earnings and profits are expected to grow.
- Which factor an investor should try to capitalize on depends in large part on his or her personality. A combination of the two may offer the best of both worlds.
Human Nature says that you want a bargain, whether you want the goods or not. You think something is a steal, you’ll buy it.
– Jason Statham
As I’ve mentioned previously, I’m a car guy. I enjoy racing them, working on them, driving them and collecting them. My modest collection includes muscle cars I bought when I was in my early 20’s, as well as new “modern classics” I’ve acquired recently.
When buying a collector car, it is important to identify the primary factor that is (pardon the pun) driving the decision to acquire the car. Is it simply the fact that you like the car and want to enjoy it, or are you buying the car as an investment, or both?
I’ve come to learn that there are essentially two ways to profit on collector cars. The first (and my preferred route) is to buy cars that have a high value factor: Cars that aren’t currently in high demand, but there is good reason to believe they will become more desirable in the future. A good example might be the Triumph GT6 (a personal favorite, although I’ve never owned one – yet).
The second is to buy cars that have a strong growth factor: A car that is currently in high demand and whose popularity is expected to continue to grow. An example of such a car might be the Ford GT.
As I briefly mentioned in an earlier post, value and growth have been identified by academics and investment professionals alike as two of the primary drivers of investment performance. The proposition underlying the value factor is that securities priced at a discount to their current value represent a good investment. By comparison, the growth factor is premised on the notion that stocks of companies whose earnings are expected to grow (or have strong fundamentals) will outperform shares of companies with lesser prospects.
As is the case with collector cars, growth stocks and value stocks tend to represent opposite ends of the investment spectrum.
- The value factor seeks to capture “alpha” by investing in stocks that are trading at a discount to their current fundamental value, while the growth factor targets stocks that are trading at a discount to their expected future value.
- Value stocks are priced low relative to their sales or profits as they are presently out of favor for one reason or another; growth stocks, by comparison, are priced higher relative to their sales or profits because investors are expecting even higher sales or profits in the future.
- Value stocks typically pay a strong dividend; growth stocks typically do not because company profits are reinvested in the company to generate future growth.
- Value stocks are cheap and therefore less risky; growth stocks are more expensive and therefore more risky.
The many proponents of value investing include legendary investors Benjamin Graham and his disciple, Warren Buffet. Growth investing has its legions of followers too; including wall street superstars Peter Lynch and John Templeton.
The relative performance of the growth factor and the value factor depends on the time frame. Over the long term, the value factor is the clear winner.
Russell 1000 Growth Total Market Index vs. Russell 1000 Value Total Market Index from 1-1-1999 to 12-31-2018
However, over the last 10 years or so, growth stocks have outperformed value stocks by a large margin.
Russell 1000 Growth Total Market Index vs. Russell 1000 Value Total Market Index) from 1-1-2008 to 12-31-2018
As in the case of automobiles, the choice of whether to invest in growth stocks or value stocks depends in large measure on the investor’s personality and time horizon. Patient investors who value a smooth ride and a safer route may want to focus on the value factor. Meanwhile, investors who are looking for quicker price acceleration and can stomach a lot of twist and turns may be happier owning growth stocks. Serious car collectors investors often own both in their collections portfolios.
As for me, my best auto investment was a 1965 Sunbeam Tiger. I fell in love with the car when I was youngster after seeing it on the ’60s comedy show “Get Smart”, which was created by legendary funnyman and director Buck Henry and the incomparable comedic genius Mel Brooks. I found my Tiger nearly 20 years ago sitting in a barn in New Berlin, Wisconsin. At the time, Tigers were a bargain (the value factor). Today, Tigers cost much more, but are still considered a top-notch investment as their popularity continues to grow (the growth factor). If you would like to see what attracted me to the Tiger all those years ago, check out this video of the introduction to “Get Smart”.
Thank you for reading.
The Market Commentator