Which is more advantageous, value stocks or growth stocks? My portfolio strategy
Value investors tend to chase undervalued stocks, but in doing so they often overlook the growth potential that a company possesses.
Expected values of undervalued stocks and growth stocks
For example, suppose there are two stocks like the following.
- PER 10x, earnings are solid and flat
- PER 20x, earnings have room to grow but are not certain
With this 2-choice scenario, value investors tend to choose the first one.
If earnings are solid and PER is 10x, the downside is limited. If the market turns upward and PER rises to 15x, a 50% profit is possible.
That is,The expected profit when investing 1,000,000 yen is 500,000 yen.
On the other hand, if earnings do not grow and PER rises to 15x, the stock price would fall by 25%. Conversely, if profits double while PER remains at 20x, the stock price would also double.
If the probability of each outcome is 50%,the expected profit when investing 1,000,000 yen is 375,000 yen(100万円×50%－25万円×50%)
Value investors think in this way andend up choosing the option with the higher expected value(the numbers are greatly simplified).
Growth stocks should be considered with “popularity”
However,the popularity of a stock whose profits double tends to rise. Therefore, suppose profits double and PER rises to 30x.
The stock price becomes 3 times: profit doubled × PER 1.5 times = 3x.The expected profit is 875,000 yen(2,000,000 yen×50%－250,000 yen×50%)（続く）
| Undervalued stock | Growth stock （Failure） | Growth stock （Success） | Growth stock （Popularity） | |
| Year X | EPS 10 PER 10 Share price 100 | EPS 5 PER 20 Share price 100 | EPS 5 PER 20 Share price 100 | EPS 5 PER 20 Share price 100 |
| X+3 years | EPS 10 PER 15 Share price 150 | EPS 5 PER 15 Share price 75 | EPS 10 PER 20 Share price 200 | EPS 10 PER 30 Share price 300 |
This is the way investors in growth stocks think. In other words,They believe that good earnings stocks also raise investor expectations. And it is precisely when investor expectations rise too much that they consider selling.
When investing in undervalued stocks, do not rely on rising popularity. Instead, wait for the gap between the “fair price” and the current price to close. As a result, you can get trapped in a “value trap” where the gap does not close easily.
So which makes more money? Different expected values depending on market conditions
So which is more profitable?
Of course, not universally. However,the stock selection should change with the market conditions, I think.
For example, if the average PER of growth stocks is 30x, unless a bubble occurs, the PER is unlikely to rise further. Therefore, growth stock investing is not necessarily advantageous.
Conversely, if the average PER of growth stocks is 15x, a market with PER 30x could yield double the profit (assuming the stock remains a growth stock, of course).
In short,when the market is good, avoid forcing investments in growth stocks; when the market is bad, invest in growth stocks to achieve higher performance.
Undervalued stocks aim to increase total performance by limiting downside, so they remain effective regardless of market conditions. However, they do not offer dramatic returns.
In other words,when the market is bad, emphasize growth potential, and when the market is good, protect with undervalued stocks or cash. By maintaining long-term observations of metrics like PER, you can determine whether now is a good or bad time.
What should I do now? My portfolio strategy
Currently, economic indicators in China are clearly deteriorating. The decade-long global economic expansion is nearing its end, and uneasy times persist.This is not a phase to invest in high-PER growth stocks.
Of course, I am looking for cheap, good individual stocks, but there isn’t a situation where many such opportunities are popping up. It is hard to gauge the direction for any stock.
That is why Ilist the growth stocks I should buy in case of a sharp drop. It is a preparation period. Analyzing without worrying about price brings more candidates to light.
When prices fall sharply, it is a chance. At that time, by aggressively deploying the reserve funds and selling some undervalued stocks to reallocate into the listed growth stocks, I believe I can raise the portfolio’s expected value.
Even if there are unrealized losses in undervalued stocks, that is inevitable. The future of the market is hard to read.It is not a bad thing to cut losses to replace holdings.
In this way,sometimes it is necessary to adjust your portfolio according to circumstances. Having your own market sense and maximizing the portfolio’s expected value is one of the essential skills for an investor.
※Tsubame Investment Advisory’s website is also worth a look.
