Capitalism and Value Investing

Capitalism and Value Investing

Although value investors have been “on the wrong side of exuberant financial markets for more than a decade,” both the value and growth approach are necessary in a capitalist economy. This according to a recent article in Harvard Business Review.

“Value managers can plausibly blame the Federal Reserve for distorting financial markets,” the article states, but adds that they also “long relied on deviations from fair prices as the foundation of their added value.” Growth investors, the article argues, can now “claim the moral high ground” since their “favored digital disrupters have transformed economies” —it cites the example of Moderna which, before it’s Covid-19 vaccine, “had never before sold an FDA approved product or earned a profit.”

The article explains the “profoundly different views about history” embraced by the value and growth camps. Value investors believe that history will repeat itself and therefore buy into “stable franchises managed by conservative executives who won’t deviate from the tried and true.” Growth investors, on the other hand, believe that for technological innovators, “the past doesn’t exist,” that “there is only creativity, always looking to what is next.”

Value investors, the article argues, may not be able to “distinguish underappreciated gems from the duds” even with careful research. Growth investors, on the other hand, require intestinal fortitude and enjoy no comfort from cheap historical valuations.”

Underscoring the difference in the two approaches, the article argues for the relevance of both: “the dynamism of our economy also requires both sensibilities.” The article concludes, “Of course, growth will not forever trounce value. Inevitably, when the world writes off vale, it will roar back.” It adds, “Regardless of personal tastes therefore, investing in both value and growth, possibly through index funds, is always wise.”

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