Q&A: Value vs. Growth Stocks, from a Value Manager Perspective
/Below is an excerpt from our recent webinar, "Value vs. Growth", originally aired on September, 22nd 2020 - featuring Metin Akyol, Ph.D, CFA, Data Scientist at Zacks Investment Management.
Historically, the average investor significantly underperforms the market – Why?
The reason investors tend to underperform is simple: the average investor works without a disciplined system, and he/she allows emotions or behavioral biases to drive investment decisions.
Sometimes investors become overconfident and misjudge risk. Other times they latch onto a price target or think they have identified a pattern that isn’t there. Whatever the case, the emotional decisions that result often lead to suboptimal investment outcomes. This is often referred to as the “behavior gap,” which can be catastrophic to retirement planning.
How to we overcome our investor biases?
Stay the course! Trying to time the market, means increasing the probability that you won’t be invested on big “up” days. And if stock market history tells us anything, it’s that there are a lot of up days.
With that stretch in outperformance in Growth/Technology stocks, are Value Managers stretching their parameters a little bit, in where they go hunting for their value names?
Zack’s Investment Management has not changed it’s parameters and will stay true to their process. Particularly in their dividend strategy, they are not changing their process because volatility and exposure pullback is expected.
Is there anything that you see in the overall evaluation of the market that would lead you to a more muted expected return over the next 5-10 years?
Not necessarily. History shows us that in the long-run, value stocks typically outperform growth stocks, because they are cheaper and stand the test of time. Recently however, the Growth space has taken off due to the overall dominance of the technology sector.
It is important to remember, when you are looking into performance, that it’s not just a difference of “Value vs. Growth” approach, but also a matter of which stocks are overly represented in each classification.
“Value” stocks are represented heavily in the energy and financial sector.
“Growth” space consists of an over-weight of technology businesses. Lately, the overall dominance of the tech sector drives a lot of what we’re seeing in growth.
Ultimately, we are expecting a convergence in the long-run of the growth and value sectors, due to an increased adaption of technology in the other sectors.
We have seen this before and the important thing to remember is that, in the long-run, short-term performance is not a reliable predictor for what you expect in the future. Instead, rely on the long-term investment plan your Advisor has put in place.
