Value vs. Growth: Which Way Is Best?

Every value investor remembers the quote from Bernard Baruch, when asked for the secret of his stock market success: “Buy your straw hats in the winter time.” Baruch isn’t alone; a host of savvy investors, including people like Warren Buffett, are devoted believers in the principle of buying undervalued companies and holding them for the long term.

But the recent bull market and the current choppy financial waters haven’t been very kind to value-oriented investors. Since the market bottom in 2009, both value and growth stocks have turned in positive performances, but value, as exhibited by popular funds like the large-cap Vanguard Windsor II fund, have generally lagged growth stocks, exemplified by Vanguard’s Morgan Growth Fund. This was especially true in 2017, as growth strongly outpaced value, and continues to be the case thus far in 2018, on both an absolute basis and compared to the S&P 500 index. In fact, recent figures showed value under performing the S&P, with growth still strongly outperforming the index.

So, what’s a value investor to do? Is it time to throw in the towel and climb aboard the growth train? One of the hallmarks of any qualified financial advisor’s work with clients is to counsel them to remain disciplined, especially in periods of high market volatility like the current time. Because we also urge our clients to diversify, we try to remind them that not all of their eggs are in the value basket; they are typically also benefiting from the performance of growth stocks in other parts of their portfolios. And investors should also remember the historical example offered by Weston Wellington, vice president of Dimensional Fund Advisors. 

Wellington recently discussed another time when value investors seemed doomed to watch from the sidelines as growth stocks captured all the gains. In the mid- to late 1990's, growth stocks like Yahoo! Inc. were not only in the headlines; they were experiencing an unprecedented run up in value. “By year-end 1998, value stocks had under performed growth stocks for the previous 3, 5, 10, 15, and 20 years,” Wellington writes. “In 1999 . . . value trailed by the largest calendar year margin in the history of the Russell indices—over 25%.” In the first quarter of 2000, the story continued, as growth stocks scored a 7% return compared to 0.5% for value stocks. Value investors were frustrated; prominent large-cap value fund manager Robert Sanborn was fired from Oakmark amid a flood of shareholder redemptions. As far as most could tell, the future belonged to growth.

But the reversal, when it came, was dramatic. Between March 31, 2000, and February 28, 2001, value stocks outstripped growth equities by 39.7%. 

The main takeaways are these: 1) Prices are always difficult to predict, both for individual securities and for asset classes; 2) Things can change dramatically in a short time frame; 3) There is sound empirical evidence for the long-term out performance of value stocks over growth stocks, but value stocks can under perform in any given period; 4) A disciplined approach that features appropriate diversification and regular rebalancing is the best method for capturing long-term gains balanced with portfolio stability.

---------------------------------

Go to the Bernhardt Wealth Management Blog where this was first published to read this and other blog entries.

About Gordon J. Bernhardt: President and founder of Bernhardt Wealth Management and author of Profiles in Success: Inspiration from Executive Leaders in the Washington D.C. Area, Gordon and his team provide financial planning and wealth management services to affluent individuals, families and business-owners throughout the Washington, D.C. area. Since establishing his firm in 1994, he and his team have been focused on providing high-quality service and independent, unbiased financial advice to help clients make informed decisions about their money. For more information, visit Bernhardt Wealth Management and Profiles in Success.