There has been a lot of press stating the stock market averages are getting back to their pre-COVID highs, but upon closer look there seems to be two markets. Each paints a somewhat different picture. The first is the stock market being led by a handful of large technology names (Apple, Google, Amazon, etc.). The price appreciation of the Growth market has been running and fueling the current rally. The other market consists of the Value stocks that are the engine of our economy (banks, utilities, energy, and many smaller and mid-size firms). Many of these companies are struggling and their stock prices are below where they were at the beginning of this year.
Recently, the prices of many of the large technology companies have risen to become expensive relative to their underlying earning. But one successful investment strategy of Growth investing is best expressed as “the trend is your friend.” In other words, if a stock or sector is running, stay with it as prices can continue to rise quickly. Done right, this strategy offers fast appreciation. The risk here is when the trend turns, it can be very abrupt and price can decline rapidly.
Another strategy is Value investing. It is best demonstrated by Warren Buffet’s phenomenal success. He studies the underlying price of a company’s stock relative to its earnings, waits for an opportunity, and doesn’t pay too much Done right, this strategy could offer substantial rewards over the longer run, yet often involves a great deal of patience. The risk here is that the analysis of an undervalued stock can be wrong and never offer any appreciation.
Currently, the divergence between the returns of the Growth and the Value markets has been dramatic with the price appreciation of Growth stocks greatly outperforming Value stocks. Value investors think this is about to change, that investors will ‘rotate’ out of growth stocks into value stocks. However, Growth investors continue to believe large technology stocks will dominate.
Each strategy goes in and out of style for reasons unknown until long after they happen, eluding even the experts. So, as always, it is important to know what type of investor you are, be diversified, know what you own, and don’t overinvest.
-Cliff Jarvis