value investing and time

The rhythms of growth and value investing are different.

In a somewhat too simple sense, growth investors have greater certainty about when market-moving information will reach the public–during the next quarterly earnings announcement–than about what that information will be. Growth investors believe, sometimes with great conviction, that earnings for XYZ will be up at least 20%, buy maybe a lot more (vs. consensus expectations of, say, 12%), but they know for sure when the actuals will be announced.

On the other hand, value investors (good ones, at least) have a firm conviction, buttressed by careful analysis of company and industry fundamentals, that a firm whose stock they hold is deeply undervalued by the market. That undervaluation is based on the company’s rich collection of assets, on which it is currently earning only a paltry return. They think this hundred dollar bill lying on the sidewalk will ultimately be picked up and put to use. They know what will happen, but they have no idea when.

Three consequences:

–value investors have a different mindset, and a much longer investment time horizon, than growth investors

–value portfolios tend to have maybe twice the number of positions as their growth counterparts, to give a greater chance that something will perform in a given year

–value investors tend to fall into two camps: dyed-in-the-wool asset value enthusiasts and value with a catalyst investors. Both use the value methodology but the latter want to see some impetus for positive change in a company before buying. They understand they’ll miss the absolute bottom, but they have greater certainty that they won’t be tossed to the curb before their ideas bear fruit.

2 responses

  1. Interesting separation. How do you see the innovation/thematic/story stock investments in high growth companies in expanding sectors? Such as the high fliers that fell in price like Icarus over the last year. Their common thesis is that over several years the growth will be undeniable, even if is lumpy. As you said about value, they know what will happen, but not when.

    • Hopefully, professional investors in early stage companies have spreadsheets that indicate how/when they picture the firms whose stocks they’re buying will swing from loss to profit. Having them doesn’t mean that the hoped-for numbers will come through, or that the holders didn’t pay a lot too much for them, just that there’s been some kind of plan.
      I’ve been surprised by the depth and relentlessness of the selloff in growth names. I think they can be divided into three groups: stay-at-home beneficiaries that investors mistakenly thought were secular growth stocks (Etsy?); companies that have promising ideas but little defense against competition (Zoom? online gambling?); and enduring growth names that have been dragged down in the overall selling.
      One of the first companies I covered as an analyst was Singer, the sewing machine maker. It was a big mess and trading at $7 a share. It’s developed world sewing machine business, which was all the market was focused on, was deeply unprofitable. But it also owned a bunch of US real estate around NYC, an important defense business worth maybe $15 a share, a Canada-based commercial flight simulator business worth about the same, a thriving emerging markets sewing machine arm, and $25? a share in tax loss carryforwards. Within a few years it was broken up and the parts sold for a total of around $70 a share. This is a classic value stock.

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