It is often said that the most dangerous words in investment are “This time it’s different”.
Indeed, long-term economic and market cycles, the principle of mean reversion and the generally accepted tenet that, while history doesn’t necessarily repeat itself, it certainly rhymes, are all central to the philosophy of most asset managers.
I can vividly remember, in late 1999, an impressively passionate global equity strategist of an international bank who was visiting his Guernsey office declaring that anyone who wasn’t prepared to embrace the new paradigm that was fuelling the boom in technology stocks was “an absolute idiot” (I’ve removed an expletive from that statement).
Despite an ingrained level of cynicism that is essential in this business and mindful of the old saying that “trees don’t grow all the way to the sky”, it was difficult not to get caught up in the euphoria of a market in which even the flakiest of profitless concepts could raise hundreds of millions of Dollars at IPO. Moreover, that was back when $100million was a lot of money! I’m sure I don’t need to point out what happened shortly thereafter (happily for our clients and us, common sense prevailed), although, as an aside, I am struck by the similarity between some of the most spectacular and derided dot.com failures (e.g. Webvan) and stocks that are mainstream successes today (Ocado) – turns out it was mostly a question of timing.The relevance and context of this trip down memory lane is the prolonged underperformance of value stocks relative to growth companies, which, save for occasional brief interval lasting four to six months, extends back to early 2007. (See chart above.) Though by no means unprecedented in terms of both duration and quantum, history suggests that a reversal of this trend in a Newtonian “equal and opposite reaction” fashion, is long overdue. Unsurprisingly, this has been a subject for discussion among the members of our Investment Management Committee for a long time.
Lately, however, we have started to question whether, perhaps, this time things are different after all.
A couple of months ago, I watched an interview on a financial media portal to which we subscribe, in which a hugely successful US value manager described the abandonment of his old doctrine and conversion to a growth style, based on the newly-formed belief that the dynamic nature of the technology industry meant that it was not subject to the principle of mean reversion. More recently, a long-established UK-based manager whom we admire greatly suggested that distinctions between “cheap” and “dear” companies, or “cyclical value” and “quality growth” stocks are currently far less important (and, thus, relevant) than whether they are beneficiaries or victims of digital disruption.
So do we subscribe to this view? Is value investing a busted flush? Certainly, when managers of the calibre we are talking about challenging established conventions, we feel obliged to take notice. Crucially, that second manager we mentioned also wrote in the same newsletter that, ultimately, value would prevail, BUT (and it’s a big but), given the pace at, and extent to which, technology is able to disrupt established industries, the way in which we perceive what is expensive or cheap needs to change. In other words, some of the companies that have traditionally been tagged with the growth label, are actually value stocks. In that respect, at least, this time really could be different!
Download : Weekly Comment – July 19 2018 – SmD