Never going out of style

Within equity investing, the two main investment styles are value and growth. Value investing typically consists of trying to buy companies “on sale” or picking stocks that have low prices in relation to factors such as earnings, sales, and the book value of the issuing companies. Growth investors seek capital appreciation in stocks that they believe will provide faster-than-average increases in share price in the future.

Relative performance between value and growth investment styles tends to oscillate in cycles. Recently, growth stocks have been outperforming value stocks and investors can’t imagine how that could ever flip. As a result, investors have continued to herd into these securities, pushing their valuations even higher. The same dynamics took place during the early 1970s bull market, the 1980s Japanese bull market, and the 1990s dot-com bubble. During these periods, growth stocks grossly outperformed value stocks. However, if we measure cumulative returns over the past 40 years, value holds the advantage.

In the 1970s, a group of stocks called the Nifty 50 reached extreme valuations. Investors thought companies like Polaroid, Westinghouse and Eastman Kodak would “grow” into their valuations. As the 1970s progressed, these valuations were no longer supported by market euphoria and the stocks experienced significant declines in the period that followed. In the 1980s, the Japanese stock market experienced a similar phenomenon, and has yet to return to its peak.

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