One of the BIG questions circulating in the investment community is how do we position our portfolios’ style tilts between growth and value? Does innovation deserve a bigger role in the portfolio or should we try to buy companies when they are on sale a la Warren Buffett?
If you believe in Reversion to the Mean then it may be time to tilt towards value.
The chart below is from Dimensional Fund Advisors (DFA), it shows the performance of US value stocks in past 10 years and since 1926 (left), and performance of US growth stocks over the same periods (right). You can see that value has performed in line with its long-term historical average while growth has significantly outperformed relative to its long-term historical average.
In fact, growth stocks have not outperformed value stocks by such a wide margin since the last .com bubble which peaked in March of 2000.
Following the .com bubble bursting, growth stocks under-performed value stocks for the next 15 years, see the chart below also courtesy of DFA.
How have growth and value stocks performed outside the United States?
Performance differentials are similar for Developed markets outside the United States, although they have not reached the extremes of the .com bubble.
The relationship holds for Emerging markets too.
Over the long-term it is hard to bet against a Reversion to the Mean.
PODCAST:
Howard Lindzon also has a great podcast called Panic with Friends which I really enjoy. I particularly enjoyed the session with Jack Newhouse where they talk about how trading and investing has evolved over time (Jack’s Dad John Newhouse offered me a job clerking in the Eurodollar pit in 1994, so I am a little biased!).
I also highly recommend Howard’s daily e-mail, you can sign up here, it great.
A couple Macro podcast that I enjoyed and think are worth listening to are the Jelly Donut podcast with Jim Bianco and Mark Yusko, both are timely and interesting.
I hope you enjoyed the letter and as always feel free to share it with friends and colleagues. If you are interested in startups you can join over 750 other backers that follow my syndicate here.
Be well and stay safe. - Sean Bill / MacroCrunch