No. of Recommendations: 19
There is lot of evidence that the markets got more efficient. Maybe we need to write about "Underperforming Managers and Lying Liars Who Don't Want to Acknowledge That".
Value stocks underperformed because of fundamental reasons. Many of them got disrupted and their earnings did not recover like they used to in the past. To make matters worse, the companies doing the disruption are growth stocks, which further increased their relative performance as compared to value stocks.
Stop blaming the market.
I think that's a bit harsh, if you actually read his paper. He's not banging on about how value stocks have done badly so his fund's recent bad returns are not his fault. The main analysis is about the currently unusual dispersion of valuations (which is pretty clear in the data), and his speculations on why that might be the case.
Growth stocks definitely always deserve higher multiples on current valuation metrics than value stocks because they are expected to have higher growth in the years to come. Rationally speaking, both groups should have relatively similar multiples of their respective FUTURE valuation metrics. Different market participants may have different investment horizons, but eventually the value has to arrive. I'll happily pay twice as much for a dollar of current owner earnings if I'm pretty sure the owner earnings per share will at least double pretty soon. If they do arrive, the premium multiple of current metrics is deserved.
He starts with the observations that (a) there is currently an unusually wide dispersion in multiples of current valuation metrics between the groups, and that (b) this unusually wide gap has persisted a fair bit longer than in prior cycles. The question is what that means, beyond the obvious. (that growth firms are collectively expected to grow faster than ever for a long time)
To me, the high dispersion has to be some mix of three different factors: firms with high multiples of current metrics (growth firms) will in fact collectively grow in measurable value considerably faster than they have in the past, and therefore justify their unusually large valuation premium. And/or their valuations are temporarily and irrationally stretched. And/or valuations are temporarily very low among the value group.
Emphasis on the word "collectively". There will certainly be some very high growth firms that will more than justify their lofty multiples of current observable value metrics, but as always those huge winners will be fairly few in number (and incidentally hard to identify in advance). However any big group of hundreds of "growth" firms will perform in aggregate a lot more modestly: faster than the average company's growth rate no doubt, but probably not (say) twice the overall average growth rate. If the pricing premium of the growth group collectively is not justified by their collective superior growth in value in the years to come, they're currently overvalued. We'll know the answer in a few years.
Jim
