"It was the best of times, it was the worst of times." This opening sentence of Charles Dickens' famous novel “A Tale of Two Cities” offers some great perspective on the wildly different economic impact that the Covid-19 pandemic has had in the last three quarters of 2020, depending on which industry or investing style we examine.
In the same way that the recovery from this past spring’s lockdowns has been quite robust for some companies (think online shopping and companies who support people working from home) and at the same time, quite difficult and even devastating for others (like restaurants, hotels, airlines and cruises); we can see significant differences (though hopefully not quite as extreme) in the performance of different investing styles during the last nine months of this year.
On one hand, investors who have a good amount of exposure to so-called “growth” stocks like Amazon and Tesla can feel pretty good about how their investments have done in 2020. On the other hand, investors whose portfolios are mostly focused on “value” stocks like banks and industrials have seen results that have been more subdued. The reason for the different results can be explained by the nature of the different investing approaches. Growth investors have a preference for the high-flying segments of the market. They seek out companies that are expected to enjoy outsized growth – relative to their industry or broader market – profiting as the company realizes its future vision, while value investors are often thought of as bargain hunters. Their strategy is to invest in stocks that are trading below their actual worth – profiting once the market corrects for this discrepancy. While value investing can be thought of as the more defensive approach to investing, there are times, like 2020, when economic conditions reward stocks of the growth companies for their focus on the future while the value companies’ stocks are temporarily left behind.
All of that being said, investors whose portfolios focus on value investing need not despair. Throughout history, there has been an alternation between periods of outperformance by growth stocks and periods when value stocks outperform.
When Warren Buffett, a man who is considered by many to be the most successful value investor of all time is asked if he regrets not having invested in Amazon, Buffett replies with an analogy, (another of his unrivaled skills): Buffett says with investing, just like with baseball, the lesson for investors is that you don’t have to swing at every pitch.
It can be very difficult to predict which investing style will outperform in the near term. In my opinion, a properly diversified portfolio should contain both investing styles, in order to prepare for all environments. The precise mix of how much of a portfolio should be managed with a growth style and how much with a focus on value will be different for everyone, so investors should work with their advisor to determine the right mix for them.
Since this past August, the advantage has actually begun to switch from growth back to value companies. Could this be the beginning of the tortoise’s comeback over the hare? Time will tell. In the meantime, with the economic recovery from this year’s recession well underway, and with the increasing availability of vaccines for Covid-19 giving markets cause for optimism, to quote another Charles Dickens novel, we can look to the year and the years ahead with “Great Expectations.”