While Investment philosophies shift and change over time, certain principles never change.
Beyond Value Investing: Navigating Today’s Stock Market
Many of the doyennes of the financial industry made their fortune and their fame through value investing. The simple argument, that if you can find a great company that is trading at an inexpensive valuation, you will make money over time. Think of the greats – Warren Buffet, Benjamin Graham, Howard Marks and Peter Lynch.
It is a great thesis, and it will almost certainly always work, but in a world where information is so prolific, it becomes more difficult to find the gems of companies that are trading below their intrinsic value.
The opposite of pure value investing is growth investing, which is identifying companies that will grow their earnings faster than other companies in the sector or faster than the market as a whole. Charlie Munger was instrumental in influencing Warren Buffet not to only look at the valuation of a company, but also to look at its potential to grow. An investor may pay a premium for the company that will grow, but the returns should follow over time.
We are living in a world where Growth Investing has dominated the markets for more than a decade. The big tech companies are dominating returns because they are growing faster than their more traditional counterparts. And then within that sector, semiconductors and chip manufacturers are growing even faster.
This introduces a new set of investing parameters, momentum investing. Portfolio managers don’t focus on the valuations much at all and rather focus on the trend of companies and sectors and ride the wave of what everyone else is investing in. This is great while it works but can turn quite quickly too.
The other theme that is emerging is Sentiment investing, where managers trawl through surveys and google searches to see how the amorphous market feels about trends and themes. This is a soft analysis rather than a mathematical model, but it seems that they are having a big impact on certain sectors and companies. Think of the “meme stocks” like GameStop, that rose to fame in the pandemic years, as retail traders with stimulus cheques and time on their hands. The social media influence was enormous, and although it has softened a bit, there are still meme stocks that are giving outsized returns despite the fact that they are hardly operational!
I came across this chart at a recent presentation I attended with Baille Gifford. It came out of an academic study, and was partly funded by Baille Gifford.
My first reaction was that it was probably a great advert for passive investing. Just buy the index and capture the performance of the 1.3% of companies that deliver the return. Sadly, it is not as easy as that because this analysis is on 61,000 global companies that sit across many different indices.
It is difficult to identify the small number of companies that fall into the 1.3% especially when they are start ups and small companies in unknown industries. Who would have thought two decades ago that the biggest companies in the world would be Apple (when smartphones didn’t even exist) or Amazon (which was an online bookstore) or Nvidia (who make the tiny chips that power other technology).
I don’t think this time is different. We still need to keep an eye on the valuations of companies, but we are in a period of great transformation and identifying companies that will play a role in the change will have greater potential for growth. Be wary of sentiment and momentum. They play a role but can change in an instant.
Good investing is the discipline to find the companies (or fund managers that will find the companies), hold your nerve through the noise and inevitable drawdowns and compound the returns. The fundamental thesis to investing doesn’t change often and typically returns come over multi-year periods.
Asset Class Returns
The table below represents a rolling year view of the major asset class returns that we track. It offers a view of the asset classes we use to diversify your portfolio.
Beyond Value Investing: Navigating Today’s Stock Market
Many of the doyennes of the financial industry made their fortune and their fame through value investing. The simple argument, that if you can find a great company that is trading at an inexpensive valuation, you will make money over time. Think of the greats – Warren Buffet, Benjamin Graham, Howard Marks and Peter Lynch.
It is a great thesis, and it will almost certainly always work, but in a world where information is so prolific, it becomes more difficult to find the gems of companies that are trading below their intrinsic value.
The opposite of pure value investing is growth investing, which is identifying companies that will grow their earnings faster than other companies in the sector or faster than the market as a whole. Charlie Munger was instrumental in influencing Warren Buffet not to only look at the valuation of a company, but also to look at its potential to grow. An investor may pay a premium for the company that will grow, but the returns should follow over time.
We are living in a world where Growth Investing has dominated the markets for more than a decade. The big tech companies are dominating returns because they are growing faster than their more traditional counterparts. And then within that sector, semiconductors and chip manufacturers are growing even faster.
This introduces a new set of investing parameters, momentum investing. Portfolio managers don’t focus on the valuations much at all and rather focus on the trend of companies and sectors and ride the wave of what everyone else is investing in. This is great while it works but can turn quite quickly too.
The other theme that is emerging is Sentiment investing, where managers trawl through surveys and google searches to see how the amorphous market feels about trends and themes. This is a soft analysis rather than a mathematical model, but it seems that they are having a big impact on certain sectors and companies. Think of the “meme stocks” like GameStop, that rose to fame in the pandemic years, as retail traders with stimulus cheques and time on their hands. The social media influence was enormous, and although it has softened a bit, there are still meme stocks that are giving outsized returns despite the fact that they are hardly operational!
I came across this chart at a recent presentation I attended with Baille Gifford. It came out of an academic study, and was partly funded by Baille Gifford.
My first reaction was that it was probably a great advert for passive investing. Just buy the index and capture the performance of the 1.3% of companies that deliver the return. Sadly, it is not as easy as that because this analysis is on 61,000 global companies that sit across many different indices.
It is difficult to identify the small number of companies that fall into the 1.3% especially when they are start ups and small companies in unknown industries. Who would have thought two decades ago that the biggest companies in the world would be Apple (when smartphones didn’t even exist) or Amazon (which was an online bookstore) or Nvidia (who make the tiny chips that power other technology).
I don’t think this time is different. We still need to keep an eye on the valuations of companies, but we are in a period of great transformation and identifying companies that will play a role in the change will have greater potential for growth. Be wary of sentiment and momentum. They play a role but can change in an instant.
Good investing is the discipline to find the companies (or fund managers that will find the companies), hold your nerve through the noise and inevitable drawdowns and compound the returns. The fundamental thesis to investing doesn’t change often and typically returns come over multi-year periods.
Asset Class Returns
The table below represents a rolling year view of the major asset class returns that we track. It offers a view of the asset classes we use to diversify your portfolio.