An argument for value investing over growth investing
Jeremy Siegel Ph.D. compares a value investment in Standard Oil of New Jersey (now ExxonMobil) vs. a growth investment in IBM. Assuming the investment was made in 1950 and that all dividends were reinvested in the company stock, which would have been the better investment?
Although both stocks did well, investors in Standard Oil earned 14.46 percent per year on the shares from 1950 through 2005, almost 1 percent percent per year ahead of IBM’s 13.09 percent return. Although this difference looks small, $1,000 invested in the oil giant in 1950 would be worth over $1,800,000 today, while $1,00 invested in IBM would be worth $867,000, less than one half the amount in Standard Oil.
The conclusion the author reaches is to avoid the “growth trap” because stocks with better valuations are better long term investments. This is true even with stocks that have small dividend yields if they do share buy backs (a company will be able to buy back more shares if its stock is not inflated by groeth investors).
Stocks that have the brightest prospects and are expected to grow the fastest are not necessarily the best investment. It all depends on the price you pay for the value you are getting. In fact, I will show in subsequent columns that it is growth relative to expectations that is the key determinant of investor returns.