Howard Marks Wades Into Growth Vs Value Investing Debate. And There’s No Winner.
The pandemic has only amplified debate over which of the two is better—growth or value investing. According to Howard Marks, the two styles should never have been viewed as mutually exclusive, to begin with.
Value investing or looking for stocks below their intrinsic values, and growth investing is hunting for young companies that grow over the long term, delivering multifold returns for investors. While growth investing came into prominence in the 1960s, the past decade led a belief that growth investing is the consensus winner and value investing may be dead.
Value stocks should theoretically be safer and more protected, even if they are less likely to earn the great returns delivered by growth companies, Marks, co-founder of Oaktree Capital Management, says in a memo to clients.
Growth companies, however, can suffer serious setbacks as the process often entails belief in unproven business models. A change in interest rates can have a meaningfully greater impact on the valuations of growth stocks because they depend for most of their value on cash flows in the distant future that are discounted to their present value by analysts to arrive at the targets. Value companies, however, rely on near-term cash flows for their valuations.
“Despite these points, I don’t believe the famous value investors who so influenced the field intended for there to be such a sharp delineation between value investing, with its focus on the present day, low price and predictability; and growth investing, with its emphasis on rapidly growing companies, even when selling at high valuations,” he said. “Nor is the distinction essential, natural or helpful, especially in the complex world in which we find ourselves today.”
Marks said that based on near-term multiples it is very hard to overprice the truly dominant growth companies that are able to achieve rapid, durable and highly profitable growth. The basic equations of finance, according to him, were not built to handle high-double digit growth as far as the eye can see, making the valuation of rapid growers a complicated matter. He quoted John Malone, “If your long-term growth rate exceeds your cost of capital, your present value is infinite.”
But he cautions growth investors:
- Every company in the affected sector is treated as a long-term winner.
- If bought in times of significant optimism and extreme valuations for growth, the stocks of even the greatest companies are likely to produce outcomes that are mediocre at best.
- In the crashes that follow most bubbles, enormous interim markdowns can befall good companies as well as bad, requiring sharp analysis to differentiate between them, and high conviction and an iron stomach to hold on.
But being value or growth investor also depends on how circumstances shape investing attitude. Marks cited his experience of parents who were born in the early 1900s and went through the Great Depression as adults, making them cautious. “Adages like ‘don’t put all your eggs in one basket’ and ‘save for a rainy day’ were watchwords I grew up with,” he says.
Those experiences are different from those whose parents were born a decade or two later than his and didn’t live with any deprivation. It is his experiences, Marks said, that led him to become a bargain hunter with a value approach.
But he has one advice of all kinds of investors: “To be a good equity investor, I think you have to be an optimist; certainly, it’s no activity for doomsayers.”