A wealth manager says now is the 'worst time ever' to invest in 'crazy expensive' growth stocks
- An Oklahoma wealth manager thinks that now is the "worst time in history" to favour growth stocks and give up on value.
- Eric Nelson, the founder and chief executive of Servo Wealth Management, said that historically low-priced value stocks have beaten higher-priced growth stocks in terms of returns.
- In the past decade, however, that trend has reversed, and growth stocks are now hugely overvalued, he wrote.
- "Is now the worst time in history to pile into growth stocks and give up on value?" — Nelson asked.
- "It sure looks that way," he concluded.
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Smart investors are aware that buying more stocks on the basis of what's done well recently rarely pays off, especially if that asset class yields the lowest relative long-term returns.
That's according to Eric Nelson, founder and chief executive of Oklahoma-based investment advisor Servo Wealth Management, which looks after $72 million in assets, according to data on financial website Radient Analytics.
"Is now the worst time in history to pile into growth stocks and give up on value?" — Nelson asked in a blog, where he outlined that low-priced value beats higher priced-growth.
"It sure looks that way," he concluded.
The last year was especially "terrible" for value stocks because the above-average value for growth stocks "pushed up their prices versus their fundamentals to levels we've never seen before," he wrote.
"Value is about as cheap as it usually is, and growth is as overpriced as it's ever been."
One index, called the Fama-French US Index, measures the performance of growth and value style investing compared to investments in all large-cap US stocks.
Historically, the Fama-French Value index has won by a clear 12.8% compared to the Fama-French Growth index's 9.7% return, which is almost as big as the spread between returns on stocks and bonds, Nelson explained.
But over the past decade, growth stocks that were led by a concentration of high-flying performers, including major tech firms, held the upper hand at a 16% return per year compared to only 7.5% from value.
"The last 10 years has seen a different story, however. Growth stocks have outperformed value stocks. This trend started in 2014 but has really [sic] picking up steam since 2017," he wrote.
Through the chart below, Nelson showed that the valuations of growth and value stocks are "out of whack" as they were during the dot-com burst.
Following the 2000 tech stock bubble, the next 10 years were "devastating for growth" and they took a long time to recover while value stocks, especially small-caps, took over.
"Consider that today, value stocks are even cheaper than they were in 2000!" he remarked.
He showed that the Fama-French US Growth Index outperformed the Value index only 7% of the time since 1927. Over the following years, every single 10-year period saw value beat growth, he noted.