Value Investing Getting Too Crowded? Another Golden Age of Growth Investing Is On The Way
One of the landmark events on the calendar of investors took place last month—the Value Investing Congress in New York. But it behooves us to remember that an alternative approach also exists—that of growth investing.
While the two styles share many common principles, growth investing focuses on identifying companies with above-average growth rates, whose share prices today are considered inexpensive relative to their intrinsic value over the long term.
The dearth of investors who publicly tout the principles of growth investing is one sign that its golden age may now be upon us. The Wikipedia entry on “Value investing” lists more than a dozen current well-known value investors including Berkshire Hathaway chairman Warren Buffett. Value investing is a sensible discipline, and its success has attracted many acolytes. When too many people are performing the same analysis and arrive at the same conclusion, however, it becomes the crowded trade.
[Continue reading…]
Another Golden Age of Growth Investing
One of the landmark events on the calendar of investors takes place this week — the Value Investing Congress in New York. But it behooves us to remember that an alternative yet equally tenable approach also exists — that of growth investing. While the two styles share many common principles, growth investing focuses on identifying companies with above-average growth rates, whose share prices today are considered inexpensive relative to their intrinsic value over the long term.
The dearth of investors who publicly tout the principles of growth investing is one sign that its golden age may now be upon us. The Wikipedia entry on “Value investing” lists more than a dozen current well-known value investors including Berkshire Hathaway chairman Warren Buffett. Value investing is a sensible discipline, and its success has attracted many acolytes. When too many people are performing the same analysis and arrive at the same conclusion, however, it becomes the crowded trade. By contrast, the only investor listed in the Wikipedia entry for “Growth investing” is Thomas Rowe Price, Jr., who died many years ago. Philip Fisher, another legend whose Common Stocks and Uncommon Profits is generally considered to be the reference work on growth investing, goes entirely unmentioned.
[Continue reading…]
Compound Thinking
Abstract
Children are trained to count linearly: one, two, three, four, five, etc. Long before mathematics was invented, however, a subjective process of estimation was used to quantify and make decisions. If the ability to appreciate quantities in linear terms confers fitness advantage, that edge appears to have eluded Darwinian selection. Studies of the Amazonian Mundurucu indigenous tribe and preschool American children all suggest that humans are innately wired to use a compressed scale to understand magnitude – not unlike those depicted by logarithmic, exponential, or power-law functions. A compressed scale is biased toward achieving higher resolution at the lower end of the spectrum where smaller numbers reside, where discriminating subtleties in degrees of scarcity can provide the greatest benefit. Psychophysical studies assessing the magnitude of subjective estimation of sensory inputs such as light intensity and sound intensity also reveal innate mapping of signals on compressed scales. From an adaptive perspective, a compressed scale of subjective estimation enables a wider dynamic range of sensory processing which is valuable in environmental signal interpretation. The hypothesis that selective pressures favored the cognitive adoption of a compressed scale for subjective estimation is consistent with the reality that natural phenomena generally unfold through iteration, yielding patterns of development that are best understood through the prism of compounding rather than the lens of linearity. Like an intellectual slide rule, modern mathematics reprograms children. It obligates them to abandon their natural cognitive tendencies, which rely on compressed scales and estimation and coerces them into adopting linear scales that provide uniform resolution along the entire scale. It resigns them to participate in a wholesale exercise of indiscriminate precision with respect to all things. This force-fed mental framework may help individuals thrive in the artificiality of our modern socio-cultural-economic landscape, replete with man-made straight lines and standardized tests. However, we believe that the conflict between our innate instinct to estimate on a compressed scale and our learned ability to quantify on a linear scale is a source of profound decision dysfunction in the modern world, particularly impairing the ability to assess the possibilities of outlier outcomes.
[Continue reading…]