What’s the best stock investing strategy? | Charts that Count


Welcome to Charts that Count. It’s one of the oldest debates
in stock market investing. Is it better to
own companies that are generating lots of cash
now and to buy those companies cheaply? Or is it better to own companies
with great growth potential that will generate lots of
cash further into the future? This is the debate known
as value versus growth. If you look at this
chart you’ll see that the growth stocks have
solidly outperformed value stocks over the last decade. $100 invested in
the growth index a decade ago has
returned over $350 as tech stocks like Amazon
and Apple have outperformed. The same $100 invested
in the value index, which features cyclical stocks
in banking and in energy, has returned less than $250. Why have growth stocks
outperformed so spectacularly? Part of the reason is
that over the last decade interest rates have fallen. And when interest rates fall the
discount applied to future cash flows goes down. In other words, lower rates
means money tomorrow is worth more, hence the
outperformance of stocks with great future
growth potential. Recently, however, the
trend has reversed. This is the same
chart we just looked at but over a much shorter
time span, just a few months. And as you can see, here,
it’s the value stocks that have
outperformed, returning almost twice what the
growth stocks have provided. Interestingly, there are two
almost opposite interpretations of what this reversal may mean. The first interpretation
is optimistic. The value stocks
are outperforming because of optimism
about the performance of cyclical stocks, again, such
as banks and energy companies. If the economy is going
to continue to be strong, then these cyclical
stocks should do well. The second interpretation
is much more pessimistic. On this view, the
outperformance of value of companies that
generate more cash now is a reflection of pessimism. In other words,
investors frightened about the economic future
are moving towards companies that have the cash today. What we have then
is a case where there’s been a clear
reversal of trend, but the interpretation
is anything but clear.

7 Replies to “What’s the best stock investing strategy? | Charts that Count”

  1. Pessimistic interpretation for me. Can't see a lot of optimistic (about world) views out there… Any I see, there is a 'burdening cost' thats too much. Ffs… We had a billionaire crying on TV at the thought of some tax. Even a 'green new deal' is too costly. To top it off… All driving jobs becoming automated is a problem too.
    if we can't make "not working" or working less, a positive…. What can we?!

  2. He mentioned the recession in the form of lower rates. WeWork (Growth Stock) is a great correlation for this argument. Their main competitor, Regis, was a Value Stock, and they didn’t need a bail out to pay for severance packages in the upcoming downturn.

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