Only when the tide goes out do you discover who’s been swimming naked – Warren Buffet
A classic stock investing debate has always existed between favoring more Growth-oriented companies or favoring companies selling at a large discount to a fair price, also referred to as Value. Choosing between these 2 competing investment styles is like choosing between cake and ice cream. You want both. In the perfect world, you can find solid growth companies selling at a discount to a fair company value, allowing you to receive a long-term return from both the profit growth and stock price returning to a fair value. Like purchasing a home in California at a 50% discount to the neighborhood. Unfortunately, those deals no longer exist as much today as in 2009. Moreover, in the past 18 months, we have seen an alarming disconnect between the stock market between traditional Growth and Value style companies, as depicted below. One of Investing’s core rules is: never delude yourself into thinking your investing when you are in fact speculating. The current disconnect in the market makes us wonder if a good chunk of participants are starting to speculate rather than invest. We believe the need for proper long-term analysis and portfolio balance to offset potential speculation are becoming increasingly important. Avoiding emotional moves and speculation over the next 2 years will prove extremely valuable for the long-term investor to continue meeting objectives. Many investors may need help over the coming years to avoid getting sucked into a trap such as tech stocks in 2000, financial stocks in 2008, Amazon / Netflix in 2020?
A little background on what we mean by the industry jargon Growth / Value. Traditionally, accounts designed to provide a more stable, higher income and reduced risk profile would be classified as a more value-oriented company. Value companies usually have mature business models that seek to maintain strong pricing power, modest growth, and typically reward long-term shareholders with a dividend or stock repurchases. Often represented by larger companies such as Coca-Cola, Proctor and Gamble, Exxon Mobile, Johnson & Johnson to name just a few. Growth companies are focused on higher revenue growth, market expansion and generally show lower profits due to higher investments in expansion. They typically pay little to no dividends as they re-invest profits in expanding growth. Companies such as Amazon, Google, Netflix, Nvidia, as an example. At the right price, either style can be very successful and lead to long-term success. Both styles should be used in portfolio management for balance and diversification. However, investor objectives and allocations may lend themselves to favor one style or another. We perform ongoing analysis on each account to balance the objectives and allocation, to keep the portfolios in proper alignment relative to goals.
Based on the study findings from Bank of America/Merrill Lynch over a 90-year period, growth stocks returned an average of 12.6% annually since 1926. However, value stocks generated an average return of 17% per year over the same timeframe. Said Bank of America/Merrill Lynch chief investment strategist Michael Hartnett, “Value has outperformed Growth in roughly three out of every five years over this period.”
Historically we see (and expect) an ebb and flow of performance between growth and value style investments with an expectation value stocks will generally outpace growth stocks long term. We have found that extreme disconnects between these styles often serve as a precursor to a future problem. In the late 90’s we saw the general market index pulled artificially higher by the technology sector and dot.com craze. Clients abandoned well-diversified portfolios to chase the unsustainable tech returns. Many moderate and conservative investors no longer found themselves satisfied with balanced returns that met the planning objectives and desired the 50%+ returns of high growth tech stocks. This directly preceded the market collapse from 2000-2002. In similar fashion, many investors desired to switch from high growth after financial stocks ran up large from 2003-2006. Many threw the towel in on higher growth and overexposed to financial stocks right before the 2008 collapse. In both cases, we saw an extreme disconnect from Growth and Value prior to the corrections. We are clearly reminded of the Warren Buffet quote: “Only when the tide goes out do you discover who’s been swimming naked”.
The common mistake during times of market disconnect has been a general disregard for consistent, long-term focus that meets a planning objective.
Stay long-term objective focused
All of human unhappiness comes from one single thing: not knowing how to remain at rest in a room. – Blaise Pascal
An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return – Benjamin Graham
Investors often get into trouble when they stop accepting an “adequate” and “safe” return as acceptable. When objectives are being met and yet the investors want more is when emotion traps them into a move toward speculative investments, often akin to gambling. Even aggressive investors should take note to remain balanced with stocks and not overexpose to a singular company, industry or sector. Investing done properly should never expose an investor to long-term loss of principal over 10,20,30 years.
Having a clear plan, balance, measurement, and objective process over good and bad times is what will lead to accomplishing your goals. Measuring against improper benchmarks, becoming short-term focused or wanting more than adequate or sustainable returns can lead to a dangerous mindset. Get caught up in the neighbors’ grass is greener or browner and you may find yourself susceptible to a trap like 2000 or 2008.
Let me close with this tidbit from Warren Buffet which I consider my guiding light in investing:
To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.
Everything we do from planning to management is focused on keeping a sound intellectual framework from being corroded by emotion. We offer this emotion-free framework to help investors succeed over the long term.
As managers, planner, and advisors, we focus on not overexposing clients to any 1 sector, industry, asset class in design to create balance and proper diversification. Our team holds a deep understanding and over 50 combined years of experience in watching these disconnects play out. While we can’t avoid all the pain when the tide goes out, we can help create staying power and capture some opportunity through our knowledge and ability to objectively navigate an emotion-filled market.
We have been blessed to walk alongside so many unique stories and objectives. We have been able to steward the long-term financial journey for many to great success over the past decades and continue to look forward to the journey ahead. It is an honor and privilege to serve you!
Evergreen Wealth Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.