The era of cheap money and low interest rates is prominent.
Will this opinion come out correct, no one knows it. But there is another era on which the investors are going to pay a lot of attention.
The end of the era of development investment.
You see, for a better part of the last decade, Value Stocks are taking it to the chin compared to their development counterparts.
In fact, what makes this rivalry interesting is that the decade from 2011 to 2021 was the only one where Vikas performed better.
For all other decades starting in the 1940s, it is the value that has always been the upper hand against development.
It is not that Vikas has never performed better than value. This is definitely. However, as far as decaded demonstrations are concerned, it has always brought the baton back to the price.
So Price investor They are keen to welcome the return of old trend with open hands.
The figures for the last few months have also been quite encouraging. In 2022, the S&P 500 Growth Stock Index is 29% below.
This means that the development index has clearly entered a bear market. Its return is -16% and 74% respectively in the last one year and the last five years.
On the other hand the Mohra S&P 500 Price Index is only 13% below in 2022. Its return is -7% and 30% respectively in the last one year and five years.
Thus, as can be seen, tables for the value index have started turning.
It may have performed less than its development counterpart over a period of 5 years, but keeps aces in a period of 1 year and year.
Now, before I go further, it becomes important for me to tell the difference between these two Development stock And price stock.
The way S&P Global – the firm behind the construction of these indices – defines it, development stocks are those that are accompanied by the highest increase in earnings, the highest increase in sales and combination of the best shares than the share price. . Price performance over a period of one year.
Value stocks on the other hand score poorly on growth parameters. However, they do very well on Book to Price, Price to Earning and Price to Sales ratio.
In other words, stock price with the lowest valuation multiplier score the highest on the dimension.
Okay, it was quite self-distinct.
Growth stocks are going through sales and profits as well as their share prices are going through a rise in prices.
And Value Stocks are attractively given importance compared to their existing book value and profits.
But what has changed in the last 12-18 months that growth stocks have come down while value stocks are proving to be flexible? After all, what is it that bothers the apple car?
Well, I have the answer to two words: interest rates.
You see, after years of easy currency policies and low interest rates, inflation has stopped stopping. Therefore, the US Fed has now launched a series of increase in interest rates which will remove the wind from the development shares.
Now I am not saying that rising interest rates do not affect price shares at all. They definitely do. However, they affect more growth shares than affecting price shares.
It is the simple mathematics of evaluation at work here.
Cash flow for growth shares is far away from future price shares. So a high interest rate i.e. a high -dominated, brings the value of development shares below the value shares.
Thus the environment of rising interest rate is a larger negative for growth shares compared to value shares.
Of course, sports also have psychological factors. You see, the reason for so much fluctuations in stock prices is that they are inspired by fear and greed. In other words, they proceed between overwelling and underwelling.
There is no award to guess that high development expectations lead to more evaluation in terms of development shares. And when these expectations are not met, they become more difficult than their counterparts.
I think it is one of the main reasons why the price has done better on development on most occasions. Since price shares have less expectations, not only do they fall less than development shares during difficult times but also surprise upwards during good times.
Well, we have covered a lot of land here. And if all this seems to confuse you, wait until you listen to Warren Buffett.
In his 1992 letter to the shareholders, Buffett argued that it was not right to separate development and price shares in this way. He thought that development and values are not different institutions but ‘linked to hip’.
In other words, there is a component of calculation of development value. It is a variable whose importance can range from negligible to huge. And its effect can be negative and positive.
In fact, he even said that the word ‘price investment’ is meaningless in itself.
Buffett argued, ‘What is the investment’ if it is not the task of asking for sufficient price to justify the amount paid.
I think I have to agree with Buffett here and leave the idea of trying to separate shares based on development and value.
Our goal should be to calculate the internal value of a stock and buy it at sufficient discounts on its market price.
It does not matter whether the stock is labeled as growth stock or value stock.
Thus, the era of development shares is definitely ending and the price stock can perform better.
However, it should not stop you from buying a growth stock, where you feel that the future growth will be more than enough to justify the price that he is currently quoting.
Similarly, buying a value stock simply because it is trading at a book value or low PE ratio at a low price, it is also wrong. It can still do much more business than its internal value.
Last but at least, I do not think there are indices separating price and development shares in India. If this had happened, I think here too, the price would have done better than development most of the time.
Nevertheless, as Warren Buffett has said so eloquent, it is not actually about the price versus growth, but is the internal value vs. value… and ensures a large thick margin of safety.
Follow these investment principles and you will be fine.
Disclaimer: This article is only for information purposes. This is not a recommendation of stock and should not be considered like this.
This article has been syndicated Equitymaster.com