Why Investors Should Tilt Toward Growth and the Unintended Consequences of Indexing

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.”