I have a couple of confessions to admit here. First a musical one, related to the title: I grew up on Long Island but never liked Billy Joel. He is a local hero and considered one of the all-time greats, but I never warmed up to his music. So there you have it.
The more important confession is that I recently came close to steering readers towards a phenomenal call, but ultimately lacked the courage of my convictions. Last week, I wrote about the possibility that investors were beginning to favor value stocks after years of being enamored of growth stocks. If we simply left it there, I would be taking an unabashed victory lap right now.
In that article, I noted that “Over the past few sessions we have seen a notable outperformance by value stocks as we head into Election Day. “ At that time, we attributed the change in sentiment to hopes for a “Blue Wave” election that would bring about a massive fiscal stimulus, and were skeptical about the prospects that meaningful stimulus would arise from a divided Congress.
But I wish I could go back and excise the last line of that article: “While I personally believe that value stocks are a sound long-term investment, I do not see evidence that investors have fully recognized their charms.” I still have faith in the investment thesis behind value stocks. Yet I failed to recognize the possibility that a viable coronavirus vaccine could turn the nascent money flows into value stocks and out of growth stocks into a tsunami.
The vaccine news acted like a black swan in that it almost immediately changed investment theses. Yet it should not have been completely unexpected. We all knew that a vaccine would be developed eventually, and possibly sooner rather than later. The Pfizer (PFE) vaccine’s initial efficacy was indeed a welcome surprise, but there was no reason to be thoroughly stunned by its timing. We saw enormous flows of money out of the tech stocks that benefitted from the “stay-at-home” trade. Their lofty valuations were seemingly justified by near-zero interest rates which were threatened by sharp rises in interest rates (though the levels are still low, to be fair). Much of that money had to go somewhere, and much of it flowed into undervalued, under-loved value stocks.
What I regret most is my prejudice against the value/growth trade. I referred to it as the “widow maker” in my recent article. It was the sort of trade that seemed logical and bound to work, but it rarely did. Sometimes the change in circumstances is enough to justify a major change in sentiment. The election and the Covid-19 news were among those circumstances. Prejudice has no place in life or investing.
Disclosure: Interactive Brokers
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