Monday, August 5, 2013

Going Out-Of-Style ?

One of the longest-running debates among investment strategists is whether "growth" stocks or "value" stocks are best.  This is called "style" investing.  Which style is best?  While there are long detailed definitions of the different styles, a shorthand distinction is that value stocks usually pay dividends while growth stocks usually do not.  Importantly, there is a common misconception that growth stocks will grow faster than value stocks. That may sound grammatically correct, but it is usually not correct.  Take a long at this chart:

Chart foriShares Russell 1000 Growth Index (IWF)

The blue line shows growth stocks while the green line shows value or dividend-paying stocks.

As you can see, value stocks have out-performed growth stocks since 2000 but not always.  Note that the distance between the lines changes over time.  Sometimes, growth stocks grow faster than value stocks, as they are right now.

This causes much consternation among income investors, who normally buy value stocks.  They are accustomed to outperforming those investors chasing growth, and they lose bragging rights at cocktail parties.

A common mistake income investors make during these times is to abandon income and chase growth.  (After all, you can spend capital gains just as easily as dividends or interest.)  But, what happens when value becomes the dominant style again, as it normally does?  Oh, yeah . . . I forgot -- they'll recognize value is outperforming again and immediately shift back.  Of course, they will . . .

Some mistakes never go out of style.