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Weekend reading: The value versus growth battle continues

Weekend reading: The value versus growth battle continues post image

What caught my eye this week.

Passive investors who dabble with the value factor and wannabe Warren Buffetts alike know that every few years, the ‘value is best’ mantra gets kicked into the long grass.

Value investing – basically buying cheap companies and ideally shorting expensive ones – has a great long-term record. However sometimes it performs like an elephant on LSD, crushing your returns.

Indeed, one theory for why value investing works is that these periods of under-performance are so miserable, few people can stick through them.

The years after the financial crisis were not kind to value investors. Slow growth and low inflation among other things made growth stocks the place to be.

But that changed in 2016, particularly in the US as this rather beautiful graph from a new GMO PDF demonstrates:

Value versus growth in US market in 2016. Divergence.

Source: GMO.

The market got giddy about Trump going on a spending spree, it looked like interest rates were headed higher and faster, and outside of Brexit-blighted Britain, growth accelerated.

However it wasn’t to last, as GMO demonstrates in the following graph:

Value versus growth: 2017 edition.

Source: GMO.

Value players might have expected a few years in the sun after their years in the – um – desert, but the market has turned around and undone the progress they made in 2016.

But the authors’ urge value disciples to hang tight:

While underperformance is never pleasant, we believe there are “good” and “bad” ways for a value investor to lose over a short time horizon.

The first 5 months of 2017 likely fit into the “good” category: The valuations for growth stocks are now pricing in earnings levels that are in excess of analysts’ expectations and the market is applying ever-expanding multiples to growth stocks while global profit margins continue to hover around record highs.

This is all classic preamble to value outperforming as an expensive market retreats to lower valuations.

It’s an interesting paper if you’re an active investor like me.

If you’re a passive investor who includes value funds in your portfolio, though, then arguably you shouldn’t be reading stuff like this.

You’ll probably do better to keep plugging money into your lagging value funds year in and year out, and trust in the long-term charts that led you to tilt to value in the first place.

From Monevator

Investing for beginners: The global stock market – Monevator

Dividends for the long run – Monevator

How to stress-test your plans with a Monte Carlo simulation – Monevator


Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1

Three Bank of England members vote for higher interest rates – BBC

UK supermarket shares fall as Amazon buys upmarket US grocer Whole Foods – ThisIsMoney

Student debt tops £100bn for the first time – Guardian

Norfolk is a hot spot for online dating fraud, but investment scammers scam Surrey – Guardian

Only 10% of trading volume today is traditional stock picking, finds JP Morgan – CNBC

Israel’s Mossad spy agency looking to invest in technology start-ups – Haaretz

Actually, most new jobs created have been full-time, says Fraser Nelson and the ONS – Twitter

Products and services

Zopa’s innovative finance ISA is here. Zopa is rebating the cost of moving funds during July – Zopa

Family Building Society’s ‘Brexit Bonds’ pay 1%, plus a 2% bonus if Brexit goes your way – ThisIsMoney

Top cash reward for switching banks jumps to £295 – Telegraph

Eon’s ‘Cap and Track’ energy tariff isn’t the very cheapest, but should stay competitive – ThisIsMoney

Saving rates on fixed-rate cash ‘bonds’ have risen (off the floor) – Telegraph

A simple conversion cable that turns a streetlight into an electric car charger – ThisIsMoney

Got £12m to spare? Here’s what it buys you in the way of luxury Maldive mansions – Guardian

Comment and opinion

A good enough portfolio is the most important thing – The Irrelevant Investor

Keep on investing as the market rises – Of Dollars and Data

Pensions are legal tax havens, use them while they last [Search result]FT

The old are eating the young – Bloomberg

The all-new standard of living [Podcast]ThisIsMoney

How to create a retirement policy statement – Morningstar

Evidence-based investor is asked to leave conference after upsetting the sponsors – T.E.B.I.

Merryn: Boring investing – that’s the future [Search result]FT

If Jim Rogers predicts a crash every year, one day he’ll be right – AWOCS

My journey to a million pound portfolio – UK Value Investor

The seduction of pessimism – Collaborative Fund

Retirement is squishy – White Coat Investor

Off our beat

Those who leave home, and those who stay [US but obvious EU Referendum parallels]Vox

Guy Verhofstadt wants answers from the British on Brexit – Twitter

Want to have more time? Clear social media apps off your phone – Raptitude

No, Peter Thiel is not harvesting the blood of the young – TechCrunch

The robot apocalypse won’t come tomorrow… – The Value Perspective

…but this bot that describes undiscovered planets is quite a poet – Twitter

And finally…

“However, once technology enables us to re-engineer human minds, Homo sapiens will disappear, human history will come to an end and a completely new kind of process will begin, which people like you and me cannot comprehend. Many scholars try to predict how the world will look in the year 2100 or 2200. This is a waste of time. Any worthwhile prediction must take into account the ability to re-engineer human minds, and this is impossible. There are many wise answers to the question, ‘What would people with minds like ours do with biotechnology?’ Yet there are no good answers to the question, ‘What would beings with a different kind of mind do with biotechnology?’”
― Yuval Noah Harari, Homo Deus: A Brief History of Tomorrow

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  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []
{ 18 comments… add one }
  • 1 Faustus June 16, 2017, 8:06 pm

    Thanks – great selection to digest as always.

    Wishful thinking about the young eating the old – if only! Fascinating to read that the problems experienced in the UK are being replicated around the world as societies age. In democracies the problem is that the grey vote is now extraordinarily powerful, with the result that fiscal measures are now geared in favour of the old at the expense of younger, working people (why, for instance, is child benefit means tested but not pensioner travel passes, winter fuel payments, free tv licences etc). That is at the same time as, in the UK at least, we have the extraordinary situation of pensioner households having higher incomes than those of working people. No major political party at present seems seriously interested in redressing the balance, but as we saw last week, younger people are beginning to wake up to how badly skewed the system has become.

  • 2 The Investor June 16, 2017, 8:24 pm

    @Faustus — Eek! Not so much wistful thinking as too-rapid typing. Have fixed the headline now. (They agree with you!)

  • 3 arty June 16, 2017, 10:27 pm

    Never ceases to amaze me how a few ridiculous headlines can plant erroneous ideas firmly as facts into peoples minds. Pensioner households do NOT have higher incomes. They have higher disposable incomes. This is only after taking into account mortgage costs and it should hardly surprise us that older generations have paid off more of their mortgages that younger generations.

  • 4 dearieme June 16, 2017, 11:12 pm

    “Pensions are legal tax havens”: tax deferral havens. I pity any poor sod who uses them to avoid 20% basic rate tax now and then finds himself facing 25% basic rate tax in retirement.

  • 5 ermine June 17, 2017, 8:26 am

    @dearieme the integration of tax and NI is a clear incoming risk, so that’ll be 32% tax in retirement 🙁 Offset somewhat by pensioner incomes usually being lower, so I suppose there’s automatic compensation – a BRT taxpayer is unlikely to have such a high savings ratio that their pension will be more than twice the personal allowance which is roughly the breakeven point in that case

  • 6 L June 17, 2017, 9:30 am

    @ TI –

    I recently picked up a bargain second-hand copy of Homo Deus. Would you read Sapiens before attempting it?

  • 7 John B June 17, 2017, 10:24 am

    @ermine while I agree it would be sensible, the grey vote would scream so loud you’d have to put in an exemption for pensions, as lawmakers love caveats

  • 8 Buzzz June 17, 2017, 10:35 am


    I would recommend sapiens first. The opening chapters of HD really reiterate the end of Sapiens. It’s no great spoiler, but makes sense to read S first.

    Also S is a very good read.

  • 9 CollReg June 17, 2017, 10:51 am

    The grey vote is an interesting concept. YouGovs stats from this week show the 70+s voted overwhelmingly for the Tories, despite them being the only party to even start to suggest ways we might begin to address the inequities between old and young.

    Much of the howls against the Tory policy proposals seemed to come from the middle-aged, perhaps because the true Greys vote by reflex not based on policy. The difficulty seems to be that we are stuck in an almost cognitive dissonance between a pious ‘must look after the elderly, they worked hard their whole lives’ and a progressive ‘it’s unfair to protect the elderly while the dwindling working youth suffer’ ideas. Either the measures to help the young may somewhat harm the old (solely fiscally hopefully), or you truly are in the realm of the Magic Money Tree (as awful and untrue as that attack line was) because designing a policy which rescues us youths without taking from the pockets of the wealthy rich seems fanciful.

  • 10 John Kingham June 17, 2017, 10:38 pm

    “However, once technology enables us to re-engineer human minds, Homo sapiens will disappear”

    I think he’s probably wrong. My bet is that 100,000 years from now there will be a band of Homo Sapiens getting ready to hunt Bison in what we now call London. their leader, called Grog, will trip over one of the many Starbucks cups which litter the jungle floor, causing him to wonder how the ancients managed to screw things up so royally.

  • 11 hosimpson June 18, 2017, 10:34 am

    Bloomberg’s article was an interesting read, though I think what they’re describing is merely a symptom. The underlying cause is uncontrolled breeding of humans.

  • 12 Learner June 18, 2017, 10:46 pm

    Great interview with an economist looking back at Ireland’s austerity programme on the FT Alphachat podcast recently: http://podcast.ft.com/2017/06/16/ireland-austerity-poster-child-or-beautiful-freak/

    Love the anecdote about asking his father for advice on taking up a 105% mortgage pre-GFC, and “confidence fairies”.

  • 13 The Investor June 20, 2017, 12:01 pm

    @Learner — Yes, I listened to it in the week and gasped at that bit, too. Bit of a sore spot for me given that I sat out the UK housing boom from 2003-2008 on the basis of similar anecdotal signs (friends getting deposits on 0% credit cards to add to then-not-ubiquitous parental handouts, a mortgage broker literally telling me to make up numbers on my half-hearted attempt to buy) and yet we saw prices march ever higher here. 🙁

    Cheers for mentioning here, anyway. I thought perhaps a bit too economics-based, but perhaps wasn’t. (This list could easily be twice as long based on my reading! 🙂 )

  • 14 Learner June 20, 2017, 2:44 pm

    Yes, I hesitated but I feel it stands out of the usual economist chatter (I rarely get to the end of an EconTalk podcast episode). Stephen Kinsella is a great speaker and it’s interesting to compare another country’s experience with an economic programme like that (child poverty doubled, but health spending was roughly maintained, large scale emmigration, and so on) in light of UK heading for the Brexit wilderness soon.

  • 15 martyn June 20, 2017, 7:16 pm

    I’d rather be poor and young than poor and old. The young can at least do something to change their lot, once you’re old the die is cast.

    I would like to means test every benefit (and properly, I’ve seen motability cars being scammed mercilessly, a tax payer funded company car for the offspring with no bik tax, just put in petrol, pay any fines and dings get fixed by the ‘owner’). I’d also want nominal payment for all services at point of consumption, visit the Doctor that’s a tenner there and then. Finally parents on benefits would get clothes vouchers, food vouchers, energy vouchers, housing vouchers etc (to be used only by the holder and on production of photo id) and only a little cash. Want to booze/smoke do the lottery have some freedom – work.

    Having straightened out the spending side, I’d then look at spending the money saved on things that actually benefit the country.

  • 16 Learner June 21, 2017, 7:10 am

    You ought to come live here in the US, martyn 🙂

  • 17 Gizzard June 21, 2017, 11:28 am

    Re: Exhibit 1. The growth curve looks to me like an exact mirror image of the value curve. That cannot be correct. Can it?

  • 18 The Investor June 21, 2017, 11:37 am

    @Gizzard — Yes, I think so. From memory those indices just divide the market in two.

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