Forever growth?

Growth stocks have been crushing value stocks over the last several years, by:

  • 6.3% year-to-date
  • 7.1% over the last year
  • 3.8% annually over the last 3 years
  • 5.5% per annum over the last 5 years

Such a strong run leads many investors to question if growth has formed a permanent advantage over value.  

Briefly, the answer is no.

Over the short to intermediate term, it’s quite normal for growth or value to out-perform for a time. But, these periods always end. Just looking back over the last 10 years, value beat growth by 1.1% annualized (even including the last 5 years of dramatic out-performance of growth over value). Over the last 80 years, the data are even more compelling: value has out-performed by over 3% a year.

What gives? Basically, investors tend to herd. They run in one direction for a while, take that too far, and then reverse direction. Value, after under-performing for 5 years, goes on to crush growth for the next 5 years. And then, following that, growth goes on to crush value for the next 5 years. Rinse and repeat. (It’s not always 5 years at a time–sometimes it’s 1.5 years, sometime 3, 5, 7, or even 10.)

Just like night follows day, growth and value go in and out of favor only to see that reversed time and again. Smart investors look to benefit from this regression to the mean by examining 20 years of results instead of the last 3 or 5 years. You can’t time the reversals, so don’t try.  Instead, bet on the long-run winning hand, and over time you’ll do very well.

You can well imagine that Apple’s outstanding growth and performance has greatly contributed to the excellent run of growth stocks over the last decade. Apple now accounts for 4% of U.S. Gross Domestic Product (GDP) and 4.4% of the value of the S&P 500.  

Even if Apple starts producing oil, cars, food, and all the other things in the economy (highly unlikely), its growth will eventually regress to the 3% growth of the underlying economy. When that happens, and it’s likely sooner than most think, Apple’s growth stock tailwind will turn into a headwind, and value will come back into favor.

I have no idea when this will happen, but I do know growth’s out-performance will end and value’s out-performance will re-emerge. In the meantime, I’ve positioned myself to benefit from long-run, time-tested investing wisdom instead of trying to play the short-run, unreliable trends of the moment. Over time, that is the winning hand.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Forever growth?

Thank you Mr. Jobs

Shoulder-high portrait of smiling man in his fifties wearing a black turtle neck shirt with a day-old beard holding a phone facing the viewer in his left handSteve Jobs was a hero of mine, and the world will truly miss him.

My parents bought my first computer, an Apple IIe, for me in the early 1980’s.  I learned to do computer programming with it and spent countless hours playing games.  I also used it to get through high school–writing papers, doing science projects, etc.  I’m an avowed computer geek and have loved using a computer to make things happen ever since.  

Steve Jobs was the indomitable spirit who brought that productive and enjoyable experience to me.  He was a hero because he had overcome great odds to create a huge, profitable and productive industry: personal computers.  That alone would have put him in the business hall of fame.  But, that wasn’t enough for Jobs.

Jobs was ousted from the company and industry he had created in 1985.  That failure was the fertilizer from which he re-invented himself and then several industries.  Jobs struggled with his company, NeXT Computer, from 1985 until it was bought by Apple in 1997.  Not unusually for Jobs, he was ahead of the industry with NeXT.  Also during that time, he bought The Graphics Group from Lucasfilm and turned it into Pixar, which was bought by Disney in 2006.  Behind the scenes, he was laying the groundwork to transform the entertainment, consumer electronics, telecommunications and computer industries.

And he did.

Pixar changed movie making forever.  Even the Disney powerhouse couldn’t compete and had to buy him out to maintain its competitive position.  Jobs ended up Disney’s largest shareholder while dramatically changing the visual content creation industry.

After returning to Apple, Jobs cleaned the company up.  He pruned unsuccessful business lines and refocused the company on its roots: user-friendly software.  His NeXT operating system evolved into Mac OS X.  He launched iTunes to make user-friendly software the gateway to digital content.  He launched the iMac to integrate his software into hardware that exploited its benefits.  He launched the iPod to exploit the benefits of iTunes.  He launched the iPod Touch to exploit and perfect the multi-touch user interface.  He launched the iPhone to bring multi-touch and user-friendly software to the phone business.  He used his iTunes platform to distribute applications (apps) to the iPod Touch and iPhone.  The iPod Touch and iPhone then came together in the iPad–seen as a replacement for using a PC for content consumption.  iTunes now seems to be transforming into iCloud, which will broaden and deepen Apple’s digital content distribution.

Jobs transformed more industries than anyone before, and perhaps ever after.  

He was a creative light, a genius with technology, a perfectionist with standards few could match, a visionary, a brilliant pitchman, and wonderfully successful and rich.  He deserved all he earned, both in reputation and money, and left us with more than we could ever repay him.

With his life over at 56, people will forever wonder what he could have done if he’d lived longer.  What else could he have come up with?  What other industries could he have remade?  Unfortunately for us and him, we’ll never know.

Perhaps one of his greatest triumphs is seldom mentioned.  I’ll call it the Wal-Mart effect.  When Wal-Mart comes to town, it lowers the prices of goods for all consumers in the area, even those who don’t shop at Wal-Mart.  

Jobs did the same thing in his industries.  Every brilliant idea Jobs had was mimicked by others.  Windows took 10 years to catch up to Macintosh, but tons of people who never touched a Mac benefited.  

Jobs raised the game of competitors in all the industries he touched: music distribution & usage (where he protected the rights of artists), mobile telephony, computers and computer software, gaming, etc.  The Jobs effect is as likely to be missed as Jobs’ own products.

Jobs has been a hero of mine since I was a pre-teen, and he’ll be a hero forevermore.  Thanks, Mr. Jobs.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Thank you Mr. Jobs