TIME TO REBALANCE?
You've likely heard that the stock market is the only store in which consumers refuse to buy products on sale, and instead demand to pay full price, if not more than for full price, for all of their purchases. It's more fun to by growth stocks like Apple, Amazon, Facebook and Google when all of our friends are buying them also. It would seem illogical to not! But, what does JAM VIEWS continually instruct us? Most everyone, especially the experts, are more often wrong than right. It's just this human nature which makes life on the planet so damn interesting. If we knew the right answers, and always made the correct decisions, what fun would that be?
This week I want to help us, one more time, understand value stocks (value investing) versus growth stocks (growth-momentum investing). Jason Zweig, The Intelligent Investor columnist, claims that the boring value stocks "are nearly the cheapest they've ever been compared with growth companies." Growth stocks have outperformed value stocks over the past decade "by one of the longest and widest margins on record." But, let's also be clear on an important point that these value companies are not wildly inexpensive historically relative to their own earnings and assets. They are wildly cheap only relative to the growth stocks' expansive valuations. Make sense?
So, even if an investor was currently bullish on the stock market, a swap, or partial swap, into more value stocks or value funds might be prudent. Let's look at some startling facts (remember, JAM VIEWS prefers facts and statistics instead of media and government narratives). Likely surprising to you today, Grandma's boring value stocks have outperformed the cool growth crowd for the majority of time since the 1930's, according to a recent report released by Research affiliates, LLC, based in Newport Beach, California [Tip: If visiting Newport, make sure you golf the Pelican Club overlooking the Pacific and then settle up all wagers across the street at the Twin Palms Night Club - it can be life-changing! But, I digress...].
But, here's where it gets interesting. According to Savina Rizova, head of research at Dimensional Fund Advisors, when growth has historically outperformed value for a decade, in the ensuing decade value stocks outperformed growth by more than 8% a year! Even when value lagged growth by 3% per year for a decade ending in 1998, it completely turned with value outperforming by 6% per year for the next decade. 6% or 8% more a year for 10 straight years has a huge effect on a 401k or 529 Plan.
Now, if or when that happens again soon, what will most real humans with 401k's do, as well as most 24-year old Bloomberg financial reporters advise? They will continue to buy high, sell low, and never create substantial wealth. They check the printout from the HR Director, and then buy all of the "good" ones (best PAST 5 or 10-year track records). Then, after a few years they sell those and buy the new "good" ones, because they just can't stand listening to their spouse one more night tell them what the guy on CNBC said! Trust me on this one. We had the privilege of serving over 3,000 clients, and the most important rule we learned was, and is, "First, do no harm."
So what are growth stocks/funds, and what are value stocks/funds? When dealing with mutual funds or ETF's, instead of individual stocks, as 98% of us should be, decisions are easier since the fund name may actually include the terms "Growth" or "Value." If not, the 1-pager tear sheets will list the top stock holdings. In simple terms, growth stocks have high earnings growth rates, trade at higher multiples to earnings (P/E ratios), and are expected to continue or accelerate their growth rates in the future. Also, they tend to be the "cool" companies with the new products, services and software. These are the companies in the news and make for enjoyable cocktail party banter.
Value stocks tend to trade at lower multiples to earnings, grow slower, and possibly pay nice quarterly dividends {Tip: Do you ever wonder why people choose to hold long-term savings in 1/2% bank accounts instead of in blue chip stocks with 4% dividends?]. Value stocks may be utility stocks (Duke Energy, Dominion Energy) or consumer durables and non-durables (Proctor & Gamble, Johnson & Johnson, Ford), and many times the lines may blur as previous growth companies mature and slow their growth rates but increase their stability, such as maybe McDonalds or Disney.
Remember that in the stock market, if you are the only one who is right, you are wrong. So, in value investing many times you must be patient, very patient, before valuations correct themselves. This why most real people cannot stay the course. They can't stand to listen to Watercooler Joe's harassment on why they are wrong one more day!
Speaking of long waits, value investors are now moving into more Japanese stocks after their underperformance for thirty years. In 1987, Japanese blue chips traded at more than 50x earnings. Today the Nikkei 2255 trades at 14x earnings, while the U.S. S&P500 trades at 20x earnings. It's confusing math for most of us to get a feel for what that means, so for example: If Nike earns $5 per share in net earnings, then in the U.S. that stock would be trading at a price of $100 per share. If Sony earns the same $5 per share, in Japan it would be trading at only $70 per share. Wall Street Journal writer Peter Landers asks us to consider Toyota Motor Corp. only trading at 10x earnings, or Honda Motor Co. where today "you get the whole motorcycle business for free." Finally, remember our lessons that no one, and no computer, has ever been accurate predicting up and down stock markets, so timing never works. Yet, modest tweaks and tilts and leans allow you to potentially maximize returns and minimize the effects of those unavoidable miserable turns. The main key is to stop allowing human nature, chemicals and emotions to push you in the opposite direction, like the rest of the crowd.
Resist the crowds. Your place is not among them. Time for a tweak?
"Those held in highest public esteem are neither the great artists nor the great scientists, neither the great statesman nor the great sports figures, but those who master a hard lot with their heads held high." - Austrian Public -Opinion Poll, "Man's Search For Meaning"
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** To access JAM Views directly please visit jeffreyamartinovich.blogspot.com
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