Personal Wealth Management / Market Analysis
Ken Fisher on Growth and Value Stocks. Which to Invest In Right Now?
Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher discusses the difference between growth and value stocks. According to Ken, there is a time and place to invest in each category. Value stocks tend to fare better in early bull market cycles while growth stocks tend to outperform in mature bull markets due to their ability to continue growing earnings amid slowing economic activity. Ken says the category emphasized in your portfolio should depend on analysis of a bull market cycle, but diversification can be an important guardrail against risk.
Ken believes the current bull market, beginning in March 2020, has an old soul—behaving like an extension of the previous bull market, which started in March 2009. According to Ken, this helps explain why growth stocks have continued leading value stocks, despite a bit of a tug-of-war. Today, when most expect value stocks to outperform, Ken says it could pay to think like a contrarian.
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Ken Fisher: To some viewers this may seem rudimentary, but some people don't seem to have clarity on what are Growth stocks, what are Value stocks and what's the difference and why is it important?
Now, this discussion is one that really goes back starting in the 1920s and has evolved over time. But Growth stocks are usually thought to be companies, from whatever industry, that have a basic capacity to grow at a materially above average rate in the long term. You probably pay a fairly significant pricing premium for that future growth, and you hope as you own them that they live up to the expectations that you've had of them. Value stocks, by contrary, are traditionally thought of as things that the market has overlooked and are selling too cheaply in relation to the core of what's there. Maybe they're relatively normal in terms of their growth qualities or even subnormal, but the market thinks even less of them, disregards them, and you can buy them cheaply relative to what they're worth.
The function of that is that there is time in history, off and on irregularly for a very long time that we can measure where Value stocks have done better and other times where Growth stocks have done better. And the reason that it matters is because these cycles can last 3, 4, 5, 8 years. And if you're in a category that's not doing well for a day, a week, a few months, that's easy to ride out. If you're in a category that is not doing well for years and years and years, it just tolls on you. And the history often is people get out of these categories after years of performing poorly just before they start to perform well, which is doubly frustrating.
The features of the stocks tend to vary. I've written about this before, talked about it for years and years. Growth stocks typically have what I call fat gross operating profit margins. That is, sales minus cost of goods sold is someplace on the high side of 45%. Value stocks typically have smaller margins there with cost of goods sold, sales minus cost of goods sold being some number like 10% to 30%.
There's a time when value does better, a time when growth does better. Typically, early in a stock market cycle off the bottom following a bear market Value stocks tend to lead. Typically, late in a bull market before it peaks Growth stocks tend to lead. In the middle more or less third of the duration of a bull market. It tends to be a standoff and sometimes a little more this way, sometimes a little more that way.
I've been of the view since the beginning of this new bull market in 2020, end of March, that this cycle is different in one way in that that bear market acted more like, and therefore it's caused the subsequent bull market to act more like, a big oversized correction than a typical bear market that takes a long time and goes to a more conventional recession. In this period, I believe growth stocks from the bottom have led and irregularly are leading, but you get periods now where it's a tug of war in 2021 was that with that tug of war going month-to-month and quarter-to-quarter, and I think that'll probably continue. But it's important to remember, a) if you want to diversify, own some of both. If you want to try to beat the market by a lot, you have to pick one and the risk of picking one is that you're really wrong too.
The fact is, a good notion to think through is kind of read media, watch TV news programs and is there allowed consensus about what should be performing best now, and that probably is exactly backwards. You should probably want to think I'm a contrarian and what everybody says you should do probably isn't what you should do right now.
So simply said, Value stocks cheap, getting a bargain relative to the stuff they have in the here and now. Growth stocks looking toward the future and high growth, there's a time for both. It's risky to be kind of all one or all the other, diversifying between the two of them makes you never 100% right and never 100% wrong. There's a time when value works, usually early in a bull market there's a time when growth works, usually late in a bull market and you just have to figure out where we are and what's best for you. Thank you for listening to me.
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A Series of disclosures appears on screen: “Investing is Securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of fisher investment or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.
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