Investing in Value Stocks and Growth Stocks
This article is a part of my Best Reads of the Month section on my website www.mikegorlon.com. Each month I pick one or two articles or blog posts that I find on the internet which I thought were really insightful, interesting or moving. Then I share them with you. You can view the previous month’s articles by going to: https://www.mikegorlon.com/best-reads-of-the-month
February 2021: Something of Value
Howard Marks’ memos are one of my favorite writings to read.
I always look forward to reading his memos as soon as they come out and this one I thought was one of his more informative ones.
In this memo, he discusses value investing and growth investing, and I think it’s one of his more informative ones not only because it’s packed with so much great experience and knowledge from Howard’s career but also because I can sense a shift in his perspective a little bit.
His stance toward the high growth stocks today and Bitcoin I believe would have been different ten years ago.
Ten years ago I think he would have dismissed them a lot more based on the traditional value measures such as P/E and P/S but today he is taking a lot more of an open mind and not dismissing them outright.
I wasn’t expecting this which led me at first to wonder if this was a sign of a top in a bull market that has seen a rapid rise from its bottom back in March 2020.
I then wondered that since he was having this discussion with his son that it was making it harder for him to be unbiased but in my opinion I don’t think this is the case.
Although in my opinion the market has seen a rapid rise from it’s March 2020 low and there are probably some areas of the market that are trading at excess valuations and could pose the risk of being in a bubble, I think that there are also some tech companies that do have large total addressable markets and require a lot less capital to grow to capture these markets therefore they aren’t as limited as companies in the past that traded at high valuations but required lots of capital to grow so there high valuations could be justified to an extent.
Howard mentions this important aspect in his memo and he also does a good job defining what value investing is and describing its history going back to Benjamin Graham.
He then delves into Warren Buffett and how he embraced using value investing to invest in growth stocks and that there is no difference between value stock investing and growth stock investing since value investing is buying an asset for less than what it’s worth and all investments — whether growth stocks or value stocks — should be bought at a price that is less than what they are worth.
Howard then goes on to mention many discussions he has had with his son that I felt were very informative because these are two very knowledgeable investors who have opposite views on certain stocks and are factoring each other’s point of view in order to make the correct decision.
One of the informative discussions they had was on when to sell or trim a position even if that position has gone up a lot.
This memo is one of Howard’s longer memos but also one of his best ones so I highly recommend giving it a read, especially if you’re interested in picking stocks.
Link: Something of Value
Here are some great quotes I gathered from Howard’s investment memo:
“When you find an investment with the potential to compound over a long period of time, one of the hardest things is to be patient and maintain your position as long as doing so is warranted on the basis of prospective return and risk. Investors can easily be moved to sell by news, emotion, the fact that they’ve made a lot of money to date, or the excitement of a new, seemingly more promising idea. When you look at the chart for something that’s one gone up and to the right for 20 years, think about all the times a holder would have had to convince himself not to sell.”
“Thus, to me the essential underlying principles of value investing are these:
— the understanding of securities as stakes in actual businesses,
— the focus on true worth as opposed to price,
— the use of fundamentals to calculate intrinsic value,
— the recognition that attractive investments come when there is wide divergence between the price at which something is offered in the market and the actual fundamental worth you’ve determined, and
— the emotional discipline to act when such an opportunity is presented and not otherwise.”
