If you find this title familiar, that's because I wrote about this before in Aug 2020.
Albeit with a little change.
Back then, the title of the article is "Is value investing still relevant? Or is it dead?". The focus of the article back then was on value investing. If you guys still remember, it wasn't too long ago where growth stocks were all the rage and people were doubting if it even made sense to continue to do value investing back then. Banks and oil related stocks perform really badly in that year. I could still remember Shell slashing their dividends for the first time since WW2 and they did so with so much gusto that the dividends were slashed by two-thirds. Many then start to question the relevance of value investing.
If you have read through that article, you would have known that the conclusion arrived was that value investing is far from dead and it's very much alive. This is exactly what you are seeing in the market today. Banks and oil related stocks are all the rage today, outperforming the broader market. In that article, I showed examples that value investing will always come back and highlighted that you might be duly rewarded if you choose to invest in value stocks during periods where they are on a downtrend (like what you see in 2020). Whoever that has sticked to value stocks then and added value stocks to their stakes in the portfolio might be really proud of their returns by now.
Though it's probably less than two years since the article was published, the whole investing situation seems to have taken a 180 degree change. Now, everyone is questioning if it makes sense to invest in growth stocks. Growth stocks have been heavily beaten down in the past few months. You will only need to look at ARKK to see how much it has fallen since 2020 to get a sense of how much sentiments in the market have changed. The sentiment that people have towards growth investing right now is exactly what people have towards value investing back then.
That of course happens with good reasons.
The Fed has adopted a rather hawkish stance in their monetary policies and is looking at raising interest rates a few times in this year to combat the rising inflation. When interest rates are raised, it's more often than not that growth stocks will be adversely impacted. For most of the growth stocks, they are usually still not profitable presently. Any increase in interest rate is going to drive up their costs in their loans and may reduce their earnings down the road or delay them from becoming profitable. This is also the reason why value stocks like banks usually benefit from an environment where there is a high interest rate.
Short term wise, there is no doubt the pressure will continue to mount on growth stocks and lead to poor investment returns if the interest rates are going to be raised a few times. An optimistic scenario of how this could turn out in the short term is that inflation is deemed to be transitory due to supply chain disruptions and Fed will then perhaps not increase the interest rates as much or as often as what people are anticipating now to combat inflation. If that is to happen, growth stocks will certainly make a comeback in the short term.
Long term wise, you are likely going to continue to do well with growth stocks. In the past decade, Russell 1000 Growth Index returned 17% annually while Russell 1000 Value Index returned 10%. You might argue that the past decade was a very bullish period. Fine. We can go further back in history to 1990. If you were to start off with $10,000 in 1990 and contribute an additional $100 every month, a portfolio which comprises of 100% small cap value stocks could return an annual growth rate of 13.27% by October 2020 while a portfolio which comprises of 100% small cap growth stocks could return an annual growth rate of 13.55% in the same period- check this article out. The difference isn't that great and bear in mind that this period comprises the dot-com bubble era too.
Seeing how the sector has now rotated into value stocks, I'm still upbeat about growth stocks. If you were to buy-and-hold, there is a good chance you will do well in the long run with growth stocks.
Hence, growth investing is definitely not dead. It might be more alive than you think it is, and could be in a form which you have not imagined.
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