07/30/2001

I have written on numerous financial subjects recently, but it is time again to focus on the one that draws the most interest - investing. In this article I want to look at your portfolio from a style perspective. Style, by which I mean - growth vs. value.

A Little Insight

Before I discuss style, I want to share a quote I read the other day from Warren Buffet of Berkshire Hathaway. If his name isn't familiar to you, you should know that he is considered one of the foremost investors in the world today. He was quoted as saying the following: "Be fearful when others are greedy, and greedy when others are fearful."

Doesn't that strike home to virtually all of us who have been in this market over the last two years. If we were all a little more fearful when the market was flying, and everyone as far as the eye could see was full of greed, we would have rebalanced sooner and saved more gains. And now, if we could get beyond our new found fear of the market and start to invest with a little greed, how much better off might we be in the future?

Portfolio Check You have been through the storm and have made it to the other side and bravely reviewed the damages on your last few statements. After a period of denial, you are now considering next steps. So it is time to analyze your portfolio a new. One view to look at is the style of your portfolio.

As the market made its correction over the last year and one-half, a major topic of discussion has been one of style. Is your portfolio balanced towards growth investments or towards value investments? Why is this important? Well, as you may know, growth stocks/mutual funds significantly outperformed value stocks/mutual funds the second have of the decade of the 90s. For example, in 1998, growth outperformed value by a wide margin 42.15% to 14.68%, as measured by the Standard and Poor's/Barra Growth Index and the Standard & Poor's/Barra Value Index, two commonly used benchmarks of the performance of growth and value stocks. However, the growth trend reversed in 2000 when growth stocks declined by 18.55% while value achieved a modest positive performance of .89%. A longer historical look at market performance indicates that value and growth stocks have tended to run in cycles.

Which style does your portfolio favor? What style should it favor? Before answering that, let me explain the difference.

Growth

Growth investors are looking for companies that are expected to increase their profits at much higher than normal rates. This approach believes that the price of a company stock will reflect its earnings growth overtime. When buying these stocks, growth investors are generally willing to pay a higher price based on their expectations for future earnings growth. The company's price/earnings (P/E) ratio tend to be higher in growth stocks, because investors are willing to pay more per dollar of earnings for the stock. Most growth stocks have P/Es of 30 or more.

Value

Value investors are considered the more price-conscious shoppers of the investment world. In other words, a stock will become attractive to value investors only after its price sinks below the estimate of the company's growth. Value stocks often have single digit P/Es.

Value investors are also attracted to "fallen angels." These are the once successful companies that enter a difficult period. They might appeal to a value investor if some new circumstance seems capable of restoring the company's good fortune. Another attractive stock to a value investor is the "cyclical" stock. Cyclical companies whose growth rises and falls with a slowdown in the economy or the company's industry. Value investors try to anticipate when the next upswing in the industry will occur and buy the stock while it is still cheap. Thus, a company could start out being a growth company, but fall into the value category.

Value Investing Is the Conservative Choice

A look back at the stock market's performance during the past 20 years shows that value stocks reduced the amount of volatility in an investor's portfolio. The worst one-year return for value stocks, during the period January 1979 through June 1998, was a loss of 6.85%, compared to the worst loss for growth stocks of 9.81% during the same period. (Again, as measured by Standard and Poor's/Barra Growth Index and the Standard & Poor's/Barra Value Index.)

Most interesting is the fact that value and growth stocks generally perform counter cyclically. Historically, growth and value stocks have moved in and out of favor at different times. Over the long term, however, value has outperformed growth -- though past performance is no guarantee of future results.

Review

Many portfolios became over balanced with high flying growth stocks and growth oriented mutual funds over the last five years. As the style cycle has recently swung and will continue to swing overtime, it is important to know what percentage of your portfolio is oriented toward growth and value. Once you have that information, you can dicide if you want to lean more towards the current value trend or if you want to try to get ready to ride the next growth "train".

If you have a portfolio that includes mutual funds it can be both easy and hard to know if a particular fund is value or growth. Certainly, if you own a fund that has the word growth or value in the name, you largely know what you own. Beyond that clear distinction, it can be hard to know what style your fund favors. I suggest turning to Morningstar or some other mutual fund evaluator that includes style analysis so that you can break down the style percentage of all your funds.

After you have made the review, which style should you own or favor at this time? Well, I cannot give specific investment advise on the Internet, but as with most things in life, it is usually good to have a balance.

1 Measured by the Standard and Poor's/Barra Growth Index and the Standard & Poor's/Barra Value Index, two commonly used benchmarks of the performance of growth and value stocks. 2 Past performance is no guarantee of future results.

Please send questions or comments to dcoffin46333@wradvisors.com.