One of the little sadness’s of life is that no stock picking method – no investing method – works all the time. If it did then everyone would do it and all the potential profits would be gone. However, what is true is that certain investment picking methods work some of the time. The trick is to be using the right one for the market conditions at the time you’re using it.
Growth Stocks
As an example, Cathie Woods’ Ark Invest. That looking for disruptive innovation worked just fabulously when growth stocks – disruptive innovation essentially – were all the rage. This past year it’s been a great way to lose all your money. Being heavy in Tesla (NASDAQ: TSLA) and FAANGs when the edge came off the boom really just wasn’t much fun.
Or we could think of the Tiger Global hedge fund which was running much the same strategy – growth stocks. Looks like that lost 54% in 2022.
Value Stocks
It’s also possible to run near entirely the other way. Which is to look for value. This is the Warren Buffett method of course, started by Paul Graham. Good solid earnings, undervalued by the market. This worked well last year – the AQR Absolute Return fund is up 43.5% over the 12 months.
Well, That’s Easy Then
Except that it’s not easy at all. For the AQR method was a complete dog of an investment philosophy from about 2017 on, while the growth ideas of ARK and Tiger made a mint. It’s not that each policy works all the time – it’s knowing which market conditions to use which in.
Current Markets Indicate Which Policy?
We’ve not really had positive interest rates for a decade and more now. Currently, given inflation, they’re hugely negative. But we do expect the inflation to fall, the interest rates to rise. Possibly even to positive real levels – where interest is higher than inflation. We’ve also not had serious inflation worries for many decades now. But given those two – inflation and positive interest rates – we do know how stocks react.
The Time Value of Money
The higher either – interest or inflation rates – are then the more money now is worth as against money in the future. This means that “value” stocks will rise relative to “growth” stocks. No, this doesn’t mean that growth stocks fall, just that the relative valuations change. So, if we see those two macroeconomic prices move that way then being out of the tech growth stories and in boring utilities and supermarkets makes great sense. But it does depend upon that “if” – no policy works all the time, any policy is dependent upon economic background.
Deep Value Investing
One idea that is starting to become fashionable is “deep value” investing. GMO seems to be the leading thinker here. The idea is that given the excesses of concentration upon growth stocks then the really boring, lower levels, of the stock market are looking really, really, cheap right now. Which is one of those ideas that could, indeed, be true. But whether it is is the big question.
That the eye came off the ball could be true. That time value of money argument works the right way for it too. Just bumbling along and making money – unexcitingly – does become undervalued in a world of zero interest rates and rises in value when rates rise.
However, it’s also possible to think that this might be more than a little hopeful. For what is being described as deep value here can also be described as zombie companies. Folk who have only remained in business because of zero interest rates and generally benign circumstances. Now we move into a possible recession and higher rates then they’ll topple. Well, maybe they will. It’s possible, perhaps, to take these ideas more than a little too far.
Investing policies and styles
We have many more than just these two ideas of course, value and growth. It’s also possible to only look at special situations. Or macroeconomic factors – be in indices dependent upon inflation and FX rates perhaps. Or, even deeper, just think that x economy is going to grow for years, like China did, so be in that market. Or, or – well, you get the point.
The point of the discussion though is that all of these strategies work sometimes and none of them do all the time. What actually matters is which strategy is used at which time. Which is what we might need to concentrate upon.
