Legendary investor Warren Buffett has again shared his love of value stocks. But others are predicting a growth stock comeback. Here’s what you need to know.
As with previous Berkshire AGMs, the session saw chairman Buffett and vice-chairman Charlie Munger cracking jokes and sharing their wisdom from decades of investing.
Here’s a couple of highlights from the Q&A part of the session:
On investing
Buffett was asked about the most important rule for investors.
“You should make sure that you don’t make mistakes that take you out of the game,” he answered.
“You should never have a night when you’re worried about your investment.
“We may make bad investment decisions plenty of times. The key is to try to stay as rational as possible.”
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On the future of value investing
On the matter of value investing, they had very different views.
Munger said value investors were going to have a harder time now that there were so many competing fund managers, and that would diminish the availability of opportunities.
“My advice to value investors is, get used to making less,” he said.
Buffett, a staunch believer in value investing, contradicted him and said there were still plenty of opportunities for value investors.
“The technology is coming and the world is changing, but that doesn’t take away opportunities,” Buffett said.
“What gives you the opportunities is people doing dumb things.
“In the 58 years we’ve been running Berkshire, I would say there’s been a great increase in the number of people doing dumb things.
“And the reason they do it is because they can get money from other people so much easier than when we started.
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“I think that investing has disappeared so much from this huge capitalistic market, and the big money is now in selling ideas to other people.
“The world is overwhelmingly short-term focused.
“If you go to an investor relations call, they’re all only interested in feeding investors’ expectations that will slightly be beaten.
“That’s a world that’s made-to-order for anybody that’s trying to think about what works over five, 10 or 20 years.”
Warren Buffett, left, with Charlie Munger. Picture: AFP
‘A stupendous decade for the value investor
In simple terms, value investing is a style where investors try to find value in companies that have slower rates of growth.
Because of this flat growth, the actual worth of these companies may not be replicated in its share prices, and hence they can be undervalued.
“Price is what you pay, value is what you get” is one of Buffett’s most famous quotes.
“It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price” is another well worn quote.
READ: As the market crumbles, here are 7 areas of well-worn Warren Buffett wisdoms to help you stay afloat
A growth stock on the other hand, is a company that’s expected to grow at a rate faster than the overall market.
They tend to have high P/E (price-earnings) ratios, indicating that investors are willing to pay a premium for their growth potential.
Rob Arnott of Research Affiliates says value stocks typically outperform their growth counterparts by a significant margin in an inflationary regimen.
“If inflation over a decade is 4 per cent or higher, value tends to beat growth by 6 to 10 per cent per annum for 10 years,” he told audience at the AFR Alpha Live conference.
“We have opportunities now to invest in value … at a time when inflation risk creates opportunity,” he said.
“I think this is going to be a stupendous decade for the value investor.”
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Falling rates good news for growth stocks
Peter Brooke, head of quantitative investments at Platypus Asset Management, said that often stocks that did poorly in bad times had higher average returns over long periods than stocks that did better during these bad times – which leads to what’s called a factor “premium”.
“One way of thinking about this is that investors want to be compensated for taking on this extra risk,” Brooke told Stockhead.
Brooke also said that value stocks typically had higher near-term cashflows and lower cashflow growth, while growth stocks typically had lower near-term cashflows and higher cashflow growth.
The value premium should therefore be positively linked to duration, he said.
“To the extent that duration risk drives the value premium, we should expect periods of rising interest rate expectations to be good news for value investors, and falling interest rate expectation to be good news for growth investors.”
Best ASX growth stocks during low-rates era
Growth stocks have indeed struggled against value stocks over the past two years, first in the face of the Covid pandemic, and then higher inflation and rates.
But for long-term investors, diversification is key and growth stocks will always have a part in their portfolio make-up.
Now that inflation is on a downward trajectory, some wonder whether growth stocks are about to make a comeback.
Growth stocks enjoyed probably one of their best periods in 2017-18.
In 2018, the RBA cash rate was at 1.50 per cent, versus 3.85 per cent today.
Share prices of small capped growth stocks rose to new heights during in 2018, and, to give an idea of the stocks thriving in this environment, these were the best performers on the ASX that year:
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This content first appeared on stockhead.com.au
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.
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