This month has been a bumpy ride and it ain’t over yet! I suppose this is to be expected from equity land. After all, short-term volatility is the price we’re really paying for those long-term returns we’re no doubt all after. Still, it can get pretty uncomfortable nonetheless! And growth stocks (all those not-yet-profit-making-yet-richly-valued stuff) took a real tumble. The Nasdaq has already lost over 17% this month, as it surpassed correction territory (a decline of 10% or more) and is heading toward bear territory (a decline of 20% or more) while the S&P 500 is down a little over 9%. Could this spell what’s to come? Is this the end for growth? Or, is it a mere blip in the system and all will return to how it was?
When it comes to investing, there’s two major styles: growth and value. Investing for growth involves buying shares in companies that you expect to outperform over the long term through increased earnings. I recently spoke to a growth-oriented fund manager who says he typically invests in companies that have the potential to increase their earnings by as much as 5-10x over the coming years! Value investing, on the other hand, is all about buying companies that are believed to be trading below what they’re really worth (i.e. below their fair value) and investors buy these companies to generate returns when said companies’ valuation returns to their true value. Though there’s gotta be a catalyst needed close this gap. Otherwise you could get caught into a nasty value trap.Â
The Great Reversal?
They say there’s going to be a major shift from growth to value. After all, we’ve enjoyed record-low interest rates for a while now, not to mention the gift of liquidity (handed to us in spades during the pandemic) that made for the perfect combo in growth land. US equities in particular have been on a stunning bull run for a while now (since 2011 actually). And with all this talk of tapering, rising rates and itchy inflation, this beautiful bubble could very well pop. If it isn’t losing steam already. Read here how it pays to hold your nerve and why you may need to master this skill sooner than you think!
Since April 2020, Cathie Wood’s Ark ETF (aka a basket of the most unprofitable companies in the universe with huge growth prospects) has gone on a wild (mainly upward-sloping) ride. Until now. It’s down 50% this month alone as investors rush for the exit door. Meanwhile, Berkshire Hathaway (the value guys) seems to be catching up. And making moves. This is a cautionary tale of the classic fable ‘The Hare and The Tortoise’. At first, it looks like the hare is winning. After all, he’s the one that’s racing ahead. But in the distance, the tortoise is plodding along. Ever so gently, and quietly. And the Sage Omaha did just that. Until, out of nowhere, he overtakes the Queen of the bull market.Â
Slow And Steady Wins The Race
I know that all anyone wants is to have returns, and quick. But look at Wood’s ARK ETF. That would’ve given you whopper returns. And quickly at that. Had you held her ETF from March 2020 to February 2021, you’d be looking at returns of 313%! In other words, you’d have tripled your money in 11 months. Except for one tiny snag: it loses you returns just as quick. Just when you had turned away. And the whole thing comes crashing down. Since February 2021, Wood’s ETF has lost investors 54%. Wiping out hold of those earlier gains!
The top 3 companies in Wood’s ETF are Tesla, Zoom and Teladoc Health. In that order. In January alone, they’re down 22%, 14% and 18% respectively. Big ouch. But you know what I think, if something sounds too good to be true, that’s because it probably is! Returns get built overtime thanks to the magic of compounding. It comes from small, consistent gains over a very, very, very long stretch of time. It’s not just one year in the making or several. It’s decades. Don’t fall into the trap of buying into ‘hype’. You do not want to be the one left holding the bag. When everyone’s already left.
This isn’t to say that these companies aren’t going to go on and change the world, but at their peak valuation, they were practically pricing in perfection. Earnings drive share prices. Not the other way round. And if you pay a high, high valuation (high by anyone’s measures), then you’ll be signing yourself up for some soggy returns in the long-term. And no one wants that. I’m a huge advocate for growth. Most of my portfolio is comprised of growth stuff but the problem comes when you hop on the bandwagon in desperate search of returns. When you become short-termist. For then, then you’ll really lose out. Just like this ETF that many, many retail investors hold and are no doubt burnt by now. That’s if they haven’t sold out yet.
Just as it’s important to own a bunch different companies in different sectors of different sizes and in different countries, diversification is as much about investing styles as it is the things you invest in. Read here about one simple thing you can do to your portfolio to lower your risk.
Value investors (aka Buffett-camp) have done pretty poorly in this past decade. Being a value investor during that period would’ve bene sad. Returns were few and far between and some of the best value stocks of the previous decade fell flat on their faces. Taking a look at the MSCI indices, the numbers speak for themselves. In the last decade, the MSCI World Growth Index returned investors an annualised return of 16.06% compared to just 10.36% for the MSCI World Value Index.
But it’s important to have a mixture of styles in your portfolio. Not 100% growth or 100% value. If, like me, you’re investing for your deposit, then you won’t only want to rely on income-generating stocks. Since they’re not gonna grow your capital. That so desperately needs to be grown if I want to have any chance of hopping onto that proverbial property ladder. In which case, I’ll need a helping of growth. Cause otherwise, I won’t stand a chance. In the growth space, there are a number of funds/ETFs to choose from. When making your choice, look at the history of the fund. How long has it been around for? Can is stand the test of time? Is it able to deliver returns in a range of circumstances?
The truth is, there’s growth everywhere. Not just in the technology sector that we think of (basically US Big Tech) which, by the way seems to be getting all the attention. There’s growth beyond those mega-caps. There’s growth in healthcare (think biotech and cures for major diseases); aviation (think flying taxis), energy (think green solutions) and loads more. Growth isn’t solely limited to US (mega-cap) stocks. Growth is everywhere.
So, while we may be looking at the beginning of the end for these richly-valued, unprofitable stuff, growth in its purest form will never die. But there will be ups and downs. The kind we’ve got going on now. And that’s just part and parcel of being an investor. If it were a smooth road (aka not much risk), your rewards won’t be that great. When stocks drop, try not to panic-sell. Like those poor folk did in March 2020. No one knows what the Market has up his its sleeve. It could be good, or it could be bad. Either way, it’s time in the market that really counts. Forget about trying to time it.
Be patient, guys. Investing is a marathon; not a sprint.
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.
Knead Your Dough 