For capital-growth investors, we look at research on a household’s decision to tilt towards value or growth stocks and the unintended consequences of passive investing. In other news, Columbia Professor Stephen Penman discusses the “value trap” and how to handle accounting in evaluating equity investments.
The Investment Strategy Pioneered by Warren Buffett Is in Crisis (CNBC, June 08)
After a decade of weak returns, Wall Street is questioning the value investing strategy embraced by investors such as Warren Buffett. Historically, in weak economic environments, growth stocks outperform value stocks. Goldman Sachs’ chief U.S. equity strategist, David Kostin believes “A modest growth environment means that growth is still relatively scare. So the growth stocks…[where] tech is a prominent area, are likely to continue to do well and outperform.”
The Unintended Consequences of Passive Investing (Money Observer, July 05)
“Investors in passive investment funds may find their investment is not as diversified as they thought,” according to the author. Investors may be surprised by the actual exposure to certain stocks in passive investment funds, justifying the need to look beyond indices. For example, “investing passively in Asia and emerging markets can lead to unintended exposures due to the wide divergence of countries included in those indices.”
Investors’ Striking Migration from Growth to Value Investing Over Their Life Cycle (LSE Business Review, July 11)
The author looks at the research presented in the paper, “Who Are the Value and Growth Investors?,” and how those findings reinforce “the view that the value premium represents a rational compensation for forms of systematic risk faced by investors.” A household’s decision to weight investments with a value or growth tilt is explained by three risk factors: job-market risk, households’ balance sheets and investment time horizon.
Yield-Hungry Investors Fall for the ‘Free Dividends Fallacy’ (The Irish Times, July 04)
A recent study entitled “The Dividend Disconnect” explains the “free dividends fallacy”: when investors wrongly think of dividends as offering a bond-like investment stream. This misconception has negative consequences on portfolio performance such as negative after-tax performance and less diversified portfolios. “Being aware of the dividends bias may help, but how best to teach investors ‘remains an open and interesting question.’”
Stephen Penman: Value vs. Growth Investing and the Value Trap (Value Walk, May 11)
As part of Columbia’s Business School’s Program for Financial Studies’ “No Free Lunch” Seminar Series, Stephen Penman, a professor of finance at the school, discusses how to handle accounting in evaluating equity investments. His analysis looks at the relationship between valuation and accounting and lays “aside many of the tools of modern finance.”
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