“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change”
The valuation differential between traditional value and growth indices has been at record levels; never before has this disconnect been so great. Therefore the ‘value versus growth’ argument is as ripe today as it has been for some time, yet it remains one I find rather opaque.
Benjamin Graham’s The Intelligent Investor, published in 1949, went a long way to explain value investing. However, definitions of what constitutes ‘value’ today vary, and stocks and sectors migrate from value to growth and back again, meaning it is not easy to compare the behaviour of an index today to one from twenty years ago.
For example, some commentators would have you believe that technology stocks are growth stocks, but once the cash is stripped out, and forward earnings are observed, many technology stocks would trade on traditional value metrics. Similarly, in the past one would be forgiven for suggesting dividends are a value trait, yet the last 10 years has witnessed dividend paying stocks amongst the most expensive in the market.
I spoke to a friend about value investing last week, and how some are now looking very cheap by historical standards; his response was ‘…that’s because they’re bad companies’. He may have a point and I respect his opinion, but I’m not sure tarring all lowly valued companies with the same brush is quite fair either.
I recently stumbled across the ‘Death by Amazon Index’, which was created by a US based advisory group, Bespoke Investment Group, in 2014. It is home to about 50 stocks that haven’t embraced technology, and were therefore obvious victims of the Amazon and wider technological revolution. Unsurprisingly the index in question has performed poorly (despite a promising start) versus the broader market.
It’s not as simple as saying all technology companies are good, and all traditional companies are bad, but this to me is a much cleaner argument to articulate and grasp. Categorising the stocks in this way is perhaps the new and improved ‘value versus growth’ trade. Those embracing appropriate levels of technology and those that aren’t. Those that aren’t afraid to change tack and those that are. Those that can disrupt and those that will be disrupted.
Some value companies will adapt and thrive, others won’t.
As investors we have a duty of care to remain style agnostic, investing only where we see the support of consumer trends and behaviours. Being able to find companies and sectors that trade on below average multiples whilst embracing technology is what separates the mundane from the great.
After such a long period of underperformance of value as an investment style, there is a plausible argument suggesting we will witness a reversion to mean, and we should be long value stocks. I’m not convinced that the old rules apply as simply in a world that has moved on from 1949.