Growth vs. Value: The Difference Between Gambling and Investing

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club
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Most investors realize that nothing outperforms a portfolio of common stocks over the long haul. (Not cash, not bonds, not real estate, not commodities nor precious metals.)

This assumes, of course, that you reinvest your dividends and stick with the program during the down times, two rather significant “ifs.”

However, it’s important to note that different classes of stocks give very different returns.

For example, Bank of America did a recent study and found that since 1926, growth stocks – companies with faster appreciation in earnings per share – returned an average of 12.8% annually. But value stocks – companies that are inexpensive relative to sales, net income and book value – generated an average return of 17% over the same period.

Compounding at these rates, $10,000 invested in growth stocks would be worth $194,294 in 25 years. The same amount invested in value stocks would turn into $506,578.

The difference is not insignificant. Value beats the heck out of growth over the long term.

Yet as I reported in my last column, value investing is on the wane. Goldman Sachs even recently called it “dead.”

Why? Because over the past decade, the performance of U.S. growth stocks has been almost three times better than that of value stocks. Index fund giant State Street Global Advisors calls it “the longest period of underperformance for value since the late 1940s.”

Morningstar reports that investors have pulled $116 billion from U.S. large-cap value funds over the past 10 years. More than a quarter of that outflow has occurred over the past 12 months.

Every asset class moves in up and down cycles, of course. There is no reason to believe that value won’t outperform again in the future.

So why are investors bailing out of the long-time champion wealth creator at precisely the wrong moment?

Blame it on what psychologists call the “Recency Bias.” This is the tendency of investors to extrapolate recent events into the future indefinitely.

When technology and internet stocks were hot in the late 90’s, for example, investors began talking of a “New Era” of limitless technological growth.

Technological innovation does tend to increase steadily. Alas, the same cannot be said of technology stocks.

Years of rising prices lulled investors into a false sense of complacency. And when the dot-com bust came the technology-laden Nasdaq index lost over three-quarters of its value – and took a full decade and a half to recover.

The lesson? Buying value stocks is far smarter and safer than chasing the hot sector du jour.

Buy a stock at the right price and not only is your upside greater. Your downside is less.

The key is to avoid “the value trap.” This is the mistaken notion that, for instance, a stock that was trading at $50 but now sells for $20 is a “value.”

It is indisputably “cheaper.” But only time will tell if it was a genuine value.

Personally, I’m not interested in middling companies with flat sales, thin margins and declining profits. I’m happy to leave “deep value” and “vulture investing” to specialists with far greater appetites for risk.

I’m more excited by profitable companies that are likely to show much-better-than-expected growth in the quarters just ahead – and are trading at a significant discount to those future profits.

In short, doing your research and buying businesses that are inexpensive relative to sales, earnings, book value and dividends is investing. Buying a stock because it’s a great story or “really moving” is just gambling.

At its best, value investing is a science.

And in my next column, I’ll introduce you to the famous womanizer who pioneered it – and taught many of the nation’s richest individuals how to build their fortunes.

Plus, on Wednesday, I’m giving a special webinar in which I’ll show you the value investing techniques you need to build a fortune of your own. Click here to sign up.

Good investing,

Alex

Thoughts on this article? Leave a comment below.

This Stock Isn’t Just Cheap – It’s A Real Value

Alexander Green’s Oxford Trading Portfolio has brought substantial returns to Oxford Communique subscribers.

That’s because many of its picks are undervalued stocks with a lot of future upside potential. PVH Corp. (NYSE: PVH) is a great example.

Here’s Alex checking on the clothing retailer last year…

PVH is one of the world’s largest apparel companies, selling its iconic brands through retail stores, discount outlets, wholesale channels and websites in more than 40 countries.

The company was transformed through its acquisitions of Calvin Klein in 2003, Tommy Hilfiger in 2010 and Warnaco – which controls Calvin Klein’s two largest apparel categories, jeans and underwear – in 2013.

Many clothing retailers have not enjoyed the best of times recently. But a few key facts may help put things in perspective:

Many shoppers have simply switched from brick-and-mortar stores to the Internet.

Annual garment sales – at more than $2 trillion – are still rising.

The world population is growing by 75 million people a year.

Discretionary income is increasing in the world’s emerging markets, home to 85% of the world’s population and 90% of those under 30.

Industry research shows these newly affluent consumers are drawn to the cachet of global brands.

PVH understands this. Fifteen years ago, its sales came almost exclusively from North America. Today it owns significant businesses in Europe, Latin America and Asia. These regions already represent more than 20% of its annual operating income. They will be a much larger part in the years ahead.

In short, PVH brands will continue to sell well in world markets. The stock is inexpensive and is selling at a steep discount to the S&P 500. And sentiment toward the stock is far too pessimistic.

- Samuel Taube with Alexander Green

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