The growth vs. value debate is intensifying globally with each
passing trading session. As a style, value investing has suffered a severe
setback in past couple of years. The growth stocks have massively outperformed,
transcending to a different stratosphere altogether. In the process the
conventional valuation methods like price to earning ration (PER) and price to
book ratio (P/BV) are suffering ignominious isolation. Many famous investors
who stood firm to the principles of value investing appear to have changed
their investment philosophy.
Mr. Ramdeo Agrawal of Motilal Oswal Financial Services,
considered one of the legendary value investors in India famously said in a
recent interview, "Value is out of fashion right now, deeply out of
fashion. Even Warren Buffett is having a tough time.“Earlier you used to buy
cheap. If you end up buying cheap, you were guaranteed to make money. That's
not the scene now.” (see
here)
Prashant Jain, CIO of HDFC AMC, another famous value investors
in India, has so far stuck to his investment philosophy. His funds have
miserably underperformed and HDFC AMC has lost the crown of largets AMC in the
country to the public sector SBI AMC. To the contrary, Saurabh Mukherjea,
founder of Marcellus Investment Managers, is a strong votary of growth
investing. His fund has been one of the top performers in 2019, making
Mukherjea the blue eyed boy of fund management industry.
Chris Pavese of the Broyhill Asset Management summarized the
global scenario in his latest communication to the investors. He wrote,
"Through the end of September, our return on invested capital was nearly
double the strong gains enjoyed by passive indices. And for a brief moment, it
seemed that value investing was finally returning to favor. In a single day,
after WeWork’s botched IPO, investors who were long momentum and short value
suffered their worst performance in almost a decade. We had hoped this was a
sign of better things to come for value investors, but alas, it proved to be
just another head fake. Our moment in the sun vanished just as quickly as it
appeared, thanks in part to the Fed’s early Christmas present to investors. A
$400 billion increase in the Fed’s balance sheet—in the fourth quarter
alone—was more than enough to spark animal spirits and a speculative blow-off
into year end, as we limped across the finish line."
While globally the famous FAANG continue to dominate the market
performance, back home the retailer R. K. Damani (an avowed value investor
himself) has become second richest Indian as the valuations of his retail
venture have just breached the exosphere. The arguments extended by the fund
managers and analysts in support of these valuations of the growth stocks
reminds me of the astronomical valuations enjoyed by the ITeS stocks during
dotcom boom era (1999-2000). Azim Premji of Wipro had then become one of the
top five richest men in the world. The glory did not last too long. But few of
the IT companies survived and validated their high valuations during bubble
period.
I am sure some of the presently richly valued companies will
also survive and justify their rich valuations today. But if history is any
guide these survivors will be very few and most others will become value
destroyer. Moreover, the price performance of growth stocks discounting future
growth today shall also pause for a long time in due course. We seen bellwether
stocks like HUL, RIL, Infosys, not giving return for many years in past couple
of decades.
The question however remains what a common investors should doo
under the circumstances. Should one shift from value stocks to growth and
participate in the momentum? Should one lighten position in the growth
portfolio and shift to value stocks?
I think the following advice given by the legendary poet
Harivansh Rai Bachchan is the most appropriate under the circumstances—
अलग-अलग पथ बतलाते सब पर मैं यह बतलाता हूँ - 'राह पकड़ तू एक चला चल, पा जाएगा मधुशाला।
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