In recent years growth stocks have dominated value stocks. As a result, many investors have flocked to a growth-oriented investment approach and stopped looking at value stocks. However, in an economic downturn, which we are facing, investors will be rethinking their “growth” stock strategy and seeking safety.
The chart above shows the Vanguard Growth ETF (VUG) and the Vanguard Value ETF (VTV). I thought it would be a great comparison between value and growth stocks. As you can see that VUG has a 298% return vs VTV of 117%. It may seem that growth stocks are the clear winner, however, a majority of the increased return was from 2012. Lastly, and more importantly, many value stocks pay dividends, so the stock value’s may not go up, but it is paying dividends.
What is value investing? A value approach is roughly defined as a bargain hunt consisting of a combination of stocks, bonds, commodities, and other assets. This approach allows value investors to look for reasons that favor a stock or investment that is currently priced lower in valuation relative to future earnings.
A growth investor is one that pays more than current earnings because he expects it to be more in the future. The keyword is “future.”
Could a stock be both value and growth? The answer is yes, many, if not most companies, were growth stocks at some time. They are often “growth” in the beginning and then mature to value stocks. In addition, some companies may have divisions that are growth-oriented. Thus many companies will have a mixture of both.
If the market continues a generally bullish trend, it would be a big win for the US stock market and for both growth and value investors in general. I say this because growth has been driving up stocks’ value in the US and other high-yield markets for years.
However, in an economic downturn, value stocks will win. I have seen it.
As a young financial advisor, I weathered the tech boom and bust of the early 2000s. IPO exploded, and my idiot uncle, who couldn’t read a Cambel soup label, was suddenly making fat stacks of cash on tech stocks.
Spoiler alert, my uncle lost everything, and over 99% of these tech stocks went under in just a few years. As tech and markets exploded, investors flocked back to value stocks.
Fast forward several years to 2008-2009, and we see the same thing. Markets go down; investors flock to value stocks.
Despite the best efforts of the Federal Reserve, I believe we are experiencing an economic downturn. Smart investors should be looking for value investing weather the storm. In the coming months, we should see a massive movement of money into value stocks and money markets.