This week in fact it was up not down at same time. The market has clearly been nervous. How do you approach this. And
particularly I read with great interest you talk about so-called growth trap.
Yeah I think you know as a value manager one of the things that happens to us all the time a client comes in a prospective
client comes in and says oh you buy value stocks how you avoid value droughts. And it's a perfectly reasonable question because
value traps are a pain for value managers but people don't seem to focus on is those same kinds of stocks exist in the growth
universe as well. Right. A trap is just a company that winds up not doing as well as investors were expecting. And those stocks
actually turn out to be more painful. If they were growth stocks then if their value stocks for not such a weird reason right up
your value stock. Nobody expected all that much from you. They're still disappointed if you do even worse. But if you're a
growth stock. If people were expecting wonderful things out of you because you were palatine and we're going to sell a bike to
everyone on earth when you fail to live up to that there's two problems. One your fundamentals are worse but to your valuation
drops right. That growth premium you have you're no longer worthy. And whether you're Palatine whether you're Netflix
whether you're in the whole series of growth stocks that have turned out to be traps in the past year. One of the interesting
things that's gone on in the past months is this has actually been the worst year to be a disappointing growth stock relative
to growth stock. So right. It's been a lousy year for growth stocks.
But the stocks that have done excessively badly relative to the rest grow are those growth companies that are disappointed.
And we we think if you're going to be hiring active managers it's important to recognize they're not going to be right every
time. And one of the things that people are only really learning pretty recently is yeah it's really painful as a growth investor
to turn out to have been wrong on a stock. And we think that that pattern of growth traps doing particularly badly is set to
continue for a while. So listen what about that. Obviously when tell our growth stocks there are a lot of things including a
wide range of different companies at the same time. In a world of rising rates rising interest rates all the things being equal
which they never are. Growth is going to do worse because you're discounting that future cash flow issue. Well and especially in
an environment where some of these so-called growth stocks are actually the non profitable stock they don't have any earnings
growth. They don't have any earnings. And I think when you combine that which those types of stocks whether it's non
profitable tech they were very narrative driven and they really represented one of the pockets of where speculative froth was
the primary driver. And in this part of the cycle those types of companies those longer duration you know eternal duration stocks
as you wait for that earnings stream in a rising inflation rising interest rate environment get absolutely hammered. The
one thing I'd say and I it's a little bit different take on the idea or concepts of growth and value. And I often describe it as
lower case. The lower case G is investing based on fundamentals or characteristics or factors of growth or value. In fact you
know Bloomberg does amazing work on factors. And if you look over the last three months over the last six months sort of this
era of tighter monetary policy high inflation rising interest rates. What's interesting is even within segments of the market
that are mostly housed in the growth indexes tech consumer discretionary communication services it's the value oriented
factors that are working that are leading meeting stocks said that trade stocks that screen well on those types of factors
whether it's strong free cash flow yield strong balance sheet lower volatility they've been doing well. So I think sometimes
investors have to take off the blinders when they think about growth in value because you can look for value in the areas that
happen to live in the growth indexes. And there are times where certain stocks that live in the value indexes don't offer a
tremendous amount of value. Utilities which have been popular stocks because of the defensive nature are now trading at a
record or near record positive or premium from a PE perspective to the S&P 500. That's not value in a traditional sense. That
doesn't mean they've become gross stocks. They still live in the value indexes. So that's another way to think about the concept
of of a value trap like Ben talked about. So Ben I'm curious about your reaction that I suspect you might not entirely
disagree because you talked about active investing. You were saying be careful about growth stocks. At the same time there
are these elements such as gold fashioned cash flow and balance sheet and volatility. It's like that within the growth sector.
There may be still some goodbyes. Yeah I mean. Well first of all there almost always are right. It
is. It would be weird if an entire half of the market and growth and value tend to be defined by half. If there was nothing worth
owning. So even a year ago there were probably some growth stocks that were worth owning. And I would say we've got we have
a strategy that we've been running for the last year and a half where we're explicitly long undervalued stocks in short
overvalued stocks. And one of the things we've found in recent months is some of the stocks we were sure a year ago are showing
up on the long side of our boat because the market has really fallen out of love with them. And
that's unnatural. You know that is a natural process. And one of the things about growth and value and that people tend to forget
they are always dynamic strategies. Right. You buy it. You buy a value portfolio. You come back in a year and some of those
stocks aren't value anymore now. Oftentimes those stocks that aren't value it's a good thing
because the market is a boom. This is actually something pretty cool and the valuation goes up and the graduated growth universe
on the growth side. What you really want is for those growth companies that you own at the beginning of the year to still
look like growth companies at the end of the year. Because if they don't it's probably because something quite bad has
happened to them. And that's a tease. People don't tend to recognize especially when they're talking about a start duration
difference between growth and value. It turns out that that dynamism that rebalancing of rose stocks to value add value to
growth means I think people overestimate the duration difference between growth as a strategy and value as a strategy by a large
amount. Listen I want to give you the last word. I was sorry a curveball here's a curveball is the real answer here. We should
all lower expectations for what they have been what we should expect from our portfolio.
I know there's nobody that I know out there that does long term capital markets expectations that has a lofty number in keeping
with say that the 10 years leading up to the pandemic or even the 10 years up until the end of last year. So I think just
where we are in the cycle the fact that household ownership of equities is as of the end of the year. Even through the first
quarter was at a record high level. That that doesn't bode incredibly ill for subsequent 10 year returns. But it does
suggest Curb Your Enthusiasm for excess returns.