Value vs growth

The Economist just ran an article which stated that since 2010 Value Stocks had grown 87% vs 171% for the market overall and 278% for Growth stocks.…

These are overall averages for large collections of companies.

Still, it is a strong endorsement of the growth stocks over the past decade. I believe this is especially true when you apply Saul’s strategy of buying into the very best of the growth companies.

There have been huge economic opportunities over the past decade, and I believer there are even greater ones in the future as economies restructure. SaaS companies in particular are exploiting these opportunities with great energy and competence.

Anyway, I thought you might enjoy looking back over the past, and considering the relative performance of even average growth vs. value companies.



Thanks Larry for sharing this analysis! I find these types of analyses fascinating and insightful, perhaps even actionable. It might even be able to add insight to the question that I often get when I describe Saul’s investing strategy to another investor**(especially on days like today)**: “yeah, that approach might work ‘now’ but what happens when value stocks begin to grow faster than growth stocks, like they did from 2002 to 2007?” (I’m cherry picking the period of time when (all) value stocks outgrew (all) growth stocks the most significantly.)

But I ask what does the performance look like if someone was only buying the “best” growth stocks, vs. all of them? Well, thanks to our board’s namesake, we have at least a proxy of how that might look. See Saul’s portfolio performance from 2000 through 2009 below

2000:   19.4%
2001:   46.9%
2002:   19.7%
2003:  124.5%
2004:   16.7%
2005:   15.6%
2006:    8.6%
2007:   22.5%
2008:  –62.5%
2009:  110.7%

I thought it might be interesting to look at a few periods between the “dot com highs” in 1999 though 2009, and periods in between.

I did the math and Saul’s portfolio grew about 6.7X during this time period (end of ’99 through ’09), or an annual CAGR (Compounded Annual Growth Rate) of 21%, a period when “value” grew faster than “growth”. But I thought, that was Saul, someone who has incredible insight and intuition, who has keen insight on when enter a position and when to get out. What would a portfolio managed by a regular person like me, with just average insight and intuition (or maybe below average) look like? To model that, I basically assumed someone like me would achieve 10% less performance, each year, than Saul achieved through that timeframe. That looks like this:

2000	9.4%
2001	36.9%
2002	9.7%
2003	114.5%
2004	6.7%
2005	5.6%
2006	-1.4%
2007	12.5%
2008	-72.5%
2009	100.7%

Doing the same math results in a 2.4X growth of your portfolio during that time period, or a 9% CAGR, which is still pretty good. Now I know there are some assumptions and observations implicit here:
• I’m assuming that Saul (roughly) followed his General Approach and Philosophy to identifying companies to invest in 2000 to 2009
• While I’m assuming Saul’s approach resulted in investing in the “best” growth companies, I did not look at just the “best” “value” companies, so that performance is not modelled. I have to assume the “best” value companies might perform better than all the value companies.

But then I wondered, how Saul’s approach compares in the worst period of time for growth stocks, from say the peak in 1999 to the trough in 2002. In fact, Saul’s CAGR is 28% during this time period, and an average person following Saul’s approach might be closer 18%, where all value stocks declined, -3% and all growth stocks declined, -23%. Below is the table of data with one other time period, 2002 though 2006, where value materially grew faster than growth.

	end of '99 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 '99-'09CAGR '02-'06CAGR '99-'02 
Saul	      1	   1.19 1.75 2.10 4.71 5.50 6.36 6.91 8.46 3.17 6.68 	  21%	     35%       28%
Avg. person   1	   1.09 1.50 1.64 3.52 3.76 3.97 3.92 4.40 1.21 2.43 	   9%	     24%       18%
Growth	    400	    270	 230  180  210	210  240  250  260  160	 220	  -6%	      9%      -23%
Value 	    220	    230	 230  200  250	270  300  350  300  150	 220	  ~0%	    ~15%      ~-3%

The takeaway? Based on this data and these assumptions, buying just the “best” growth companies typically result in better performance even in a secular period where “value” grows faster than “growth”. What about in 2008, when Saul lost ~63% of portfolio? Both growth and value were down about 50% in that time frame. Really, that’s one of the few time periods in which Saul underperformed. But as we know, he didn’t sell, and the next year resulted in more than doubling his portfolio and went on to enjoy substantial market beating performance in the following 12 years. I hope you find this interesting.