Long-term investing strategies are often categorized as either “value” or “growth.” Both strategies’ ultimate goals are to achieve investment returns that are above the market average, under a long-term time horizon.
“Value” investing chooses among stocks that are selling at a discount to the underlying companies’ “intrinsic” values. It anticipates that over time, the market will revalue the shares upwards to their fair value calculations. In the meanwhile, the investor collects income from a value stock’s above-average dividend yield. The combination of yield income and the capital appreciation achieved when the stock price ascends to intrinsic value generates an attractive total return for the investor.
“Growth” investing relies on above-average capital appreciation over the investment time horizon. Investors expect the market to continue to place high-growth premium valuations on the companies’ shares. These businesses are usually positioned as industry leaders; they are able to hold and fortify competitive advantages, such as innovation, talent and best execution practices. Escalating growth in top-line revenues and shareholder-wealth-building free-cash flows are metrics incorporated into the lofty stock price levels.
“Momentum” is altogether in a different category than Value or Growth. It describes a trend in a stock’s trading pattern. Traders watch this over the short term, usually over a period of 6 months, perhaps up to one year. A law of physics, Newton’s First, ably explains momentum as it pertains to stocks: A body in motion, stays in motion, a body at rest, stays at rest, unless acted upon by a force.
Stock market levels are determined by the amalgamation and synthesis of information, ranging from individual company fundamentals, to central bank setting of interest rates, to currency exchange rates, to participant levels of optimism or pessimism. The marginal dollar flowing into a stock determines its price level at a point in time. If the stock has been in motion on the upside, it will tend to stay on its upward course. The technical indicators ascribe that it has positive momentum.
Benjamin Graham, the 1920s pioneer of security analysis and the “father” of value investing famously said: “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” It describes the interplay of momentum and short-term price motion with long-term stock performance. Often, familiar, popular stocks can get bid up through a positive momentum trend. Prices can exceed rational expectations. Momentum can affect downside stock price motion also. However, when a stock falls below its long-term “intrinsic value,” at some point, value investors not worrying about emotional popularity find the security attractive.
Value investors start anteing up purchase dollars because the discount to intrinsic value allows for a “margin of safety.” Margin of safety is a desired multiple of “reward weight” over “risk weight.” The combination of the margin of safety multiple and the dividend-income stream makes holding the shares worthwhile. Over the very long term (decades and generations) studies consistently show that Value style returns exceed Growth style returns. Stocks with margin of safety and compounding dividend streams, in the long run, have better returns than those received solely from capital appreciation based on an underlying company’s projected future growth rates.
No matter the investment style employed, we believe the tried and true portfolio management techniques of discipline and diversification still reign high above all else. Investors should always place a premium consideration on a manager’s dedication to routinely focusing on these traits. In the long run, fundamental, rational, and disciplined management decisions on a diversified portfolio should continue to produce above-average risk-adjusted returns.
Note: Barbara E. Tomalonis, MBA, is a Portfolio Manager at Point View Wealth Management, Inc., a registered investment advisor at 382 Springfield Ave., Summit.
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