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Tags: Warren Buffett | value | growth | investing

WSJ: Frustration Deepens for Value Investors as Growth Style Triumphs

WSJ: Frustration Deepens for Value Investors as Growth Style Triumphs

By    |   Monday, 07 August 2017 03:03 PM EDT

Value investing, the investment style popularized by billionaire Warren Buffett, is significantly lagging behind its growth counterpart this year. That underperformance continues a trend since the stock market bottomed during the financial crisis.

In the first six months of the year, the Russell 1000 Growth Index outperformed its value stock counterpart by 10 percentage points, the widest spread over that period since 2009, The Wall Street Journal reported.

The performance of U.S. growth stocks has been almost three times better than that of value stocks in the past 10 years. Index fund giant State Street Global Advisors describes the period as “the longest period of underperformance for value since the late 1940s.”

Investors have redeemed $116 billion from U.S. large-cap value funds in the past 10 years, according to Morningstar, and more than one-fourth of that outflow happened in the past 12 months.

Value stocks typically are less expensive than many peers in proportion to their earnings or reported net worth. Fund managers buy them while anticipating long-term appreciation.

Investors have shunned value stocks in favor of companies with rapid earnings or price growth, like Amazon.com Inc., Netflix Inc. and Tesla Inc.

And even Buffett, chairman and chief executive of Berkshire Hathaway Inc., has bought tech stocks like Apple, and this year said he regretted not buying Amazon and Google, which have continued to innovate and grow revenues.

Meanwhile, stocks have become expensive in terms of their price-to-earnings ratios as investors pay more money for meager profit growth.

“Stocks that look cheap relative to traditional fundamental metrics such as profit or cash flow have fallen so far out of favor that Goldman Sachs in June questioned whether the markets are witnessing the death of value investing,” according to the WSJ. “With value investments in Europe and Asia also struggling, value funds globally are on track to post their worst performance this year relative to growth funds since before the financial crisis.”

Some investors worry that stocks are due for a significant pullback that will punish anyone who buys stocks at their current levels, similar to the dot-com bust of 2000 to 2003.

“The super-stocks that lead a bull market inevitably become priced for perfection,” Howard Marks, the co-founder of Oaktree Capital Management, told the newspaper. “And in many cases, the companies’ perfection turns out eventually to be either illusory or ephemeral.”

Value stocks, such as financial and industrial companies, did surge after the election of Republican Donald Trump on a platform of tax cuts, less regulation and billion-dollar spending on roads, bridges and airports. But those gains faded as the Trump euphoria wore off amid legislative roadblocks and investigations into his campaign’s connections to Russia, The Financial Times reported on June 2.

Meanwhile, stocks have gotten expensive compared with their historical averages. The S&P 500 is trading at more than 21 times its earnings, 30 percent higher than the long-term average of about 16 times. Yale economist Robert Shiller’s “Cape” ratio, which tries to smooth out short-term blips, is at 30 times, comparable to the 1929 peak that preceded a crash.

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Value investing, the style of buying stocks endorsed by billionaire Warren Buffett, is significantly lagging behind growth investing this year.
Warren Buffett, value, growth, investing
Monday, 07 August 2017 03:03 PM
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