Value and growth investing have long had a back and forth relationship, with one style leading the market for a period before investors turn in favor of the opposite style. With markets that don’t always invest in the same manner, it is important to stick to your principles, says veteran value investor Mark Donovan.
Value investing is the practice of finding stocks whose market price does not reflect its true potential based on its business fundamentals. Put simply, it means searching for those unloved gems that can significantly rise in price once their underlying promise is released.
However, in the age of a market increasingly dominated by the major tech stocks that can account for the majority of investment performance, value has played second fiddle to these growth stocks. This phenomenon was made worse by the Covid-19 pandemic, which caused investors to seek safety in growth stocks and other ‘expensive defensives’.
Now the tables have turned, as vaccinations have signaled the end to the pandemic, and value investing is back in fashion. Indeed, the style has been outperforming growth since the last quarter of 2020 and into 2021 now that economies are reopening as lockdowns are lifted.
In an update to an article originally published in April 2019, Senior Portfolio Manager Mark Donovan looks back on his decades of experience to explain how five principles of value investing have always stood the test of time. They have survived wobbles before, and can now guide value investors in this transitioning market.