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Posted 9/8/2000
Kenner & Niederhoffer
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Value lovers tilt at the windmills of growth
Old-hearted investors have again done battle with the young and strong, and the result was another massacre. But like Don Quixote, they keep fighting their losing battle.
By Laurel Kenner and Victor Niederhoffer
The market battle during the past month presented a confrontation of growth vs. value stocks, old-hearted vs. young-hearted investors, the Nasdaq ($COMPX) vs. the S&P 500 ($INX). The forces of growth massacred the other side. The Nasdaq rose 12% to the S&P’s 6%.
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These adversaries have battled many times before. The outcome was merely the latest in a conflict in which the Nasdaq has been a 2-to-1 winner for the last 10 years. Through the end of August, the actual score is a 1,003% return for the Nasdaq vs. 492%, including reinvested dividends, for the S&P 500.
Sam Eisenstadt, Value Line’s research chief, has been studying the performance of growth vs. value stocks for many years. The performance of value stocks shown by many academic studies is, alas, skewed by the addition or deletion of stocks from the sample in midstream, or by the assumption of knowledge not actually available at the time. Yet others are marred by choice of time frame. For example, the study of Yale Professor Robert Shiller that Fed Chairman Alan Greenspan relied on so heavily to come up with his extremely detrimental and ad hoc theory of irrational exuberance left out the P/E-return relationship for all base periods beginning after 1989 -- a highly relevant stretch. Einsenstadt, however, correctly bases his calculations on stocks and information that would have been available to the investor as of his or her individual start date.
Eisenstadt’s growth vs. value study, published periodically in Value Line, uses 1,500 company years of data and shows that growth has outperformed value five times over. You’d think that investment spectators would get tired of witnessing such a lopsided battle, but they have been spurred on by leaders of the value cult. Without in any way succumbing to an ageist bias, we will merely note that many of the leaders tend to be above 70 -- and they all have minds of well above 100.
“I think ‘value stocks’ need sizable cyclical market swings -- none of which we’ve had in recent years -- to make that strategy worthwhile,” Eisenstadt told us. “Much of its reputation as a winning strategy dates back to the wild market fluctuations of the 1930s.” That period is very vivid in the memories of the old-hearted and their children, but possibly not very relevant today.
Kenner & Niederhoffer
Victor Niederhoffer has traded stocks, currencies and futures worldwide for the past 40 years; he is the author of "The Education of a Speculator." Laurel Kenner is a trader and former Bloomberg markets editor.
The mistress of markets loves to maintain interest in the game by providing the illusion of hope to all. On Tuesday and Wednesday, the old-hearted won a resounding victory, with the Nasdaq down 5.2%, the S&P 500 down 1.9% and the Barra Value Index ($SVX.X) up 0.4% How perfect, just after the end of a holiday, when new frames of reference are appropriate, that the market would start the losing side off with a bisque. (Just as the non-electrical, no-research stocks favored by the value folks have withered to nothing over the years, the sport of court tennis, favored by royals and ecclesiastics, has shown a similar decline. From more than 1,500 courts in pre-revolutionary France alone, there are now only a handful of courts all over the world. And in this game from the era of grand dukes and town criers, the royals give the weak side a leg up, via points called “bisques.”)
A beautiful market portrait
When we last had the pleasure of communicating with our readers, we noted that we fully expected that when we came back, “everyone who uses proper money management in adding armor to their investment portfolios will be in a much more halcyon state of mind.” Indeed, our happiness is even greater than we had imagined. The Nasdaq gained 15% from our last column on July 28 through last Friday, while the Dow and S&P 500 each added 7%.
The Nasdaq’s 2.2% decline on Tuesday, the day after Labor Day, was a beard on that beautiful market portrait. Fortunately, conscious of the timeless and resolute tendency in the market to bow and scrape on occasion to the ancient regime, Vic spent his vacation traversing the path of Don Quixote in Spain to appreciate the noble efforts of Cervantes, the Western world’s first novelist, in showing the futility of old-hearted ways. By so doing, Cervantes prepared the way for the Renaissance and scientific revolution that provided the tremendous gains in material well-being and freedom that the average guy and doll has enjoyed since then.
The Don Quixote saga is one of heroic battles, with wins and losses equally divided but with the ultimate outcome the hero’s loss of his assets, his mind and, ultimately, his life. Somehow, Cervantes knew even then the inevitable fate of all old-hearted folk who proudly boast that they long for the golden days when the words “electricity” and “computers” were unknown.
Read Briefing.com's weekly market recap on MSN MoneyCentral's Investor.
The spirit of Don Quixote
The performance of these Disasters turned out to be in keeping with the spirit of Don Quixote: somewhat futile. The average change in the week following their embarrassment was -2%. Three weeks thereafter, they had sunk still lower, to a loss of 3%.
Despite meeting distress at every corner, despite the sanctions of his friends, the burning of his books, the pitying laughter he aroused, Don Quixote always maintained a hopeful mien. We can do likewise, thanks to the performance of our Down 35 Index. These are stocks that fell from above $200 to below $100 in the Nasdaq’s crash earlier this year. No mere disasters of the week, these, but climactic bursts. On average, they are up 33% since we recommended them on April 28. That compares favorably with the 6% gain for the Nasdaq 100, as well as 4% rise in the S&P 500 and the 5% rise in the Dow Jones Industrial Average.
The Down 35
| Stock | Return 4/28-9/5 |
| Interwoven (IWOV, news, msgs) | 177% |
| Emulex (EMLX, news, msgs) | 121% |
| Human Genome Sciences (HGSI, news, msgs) | 117% |
| Medarex (MEDX, news, msgs) | 108% |
| Juniper Networks (JNPR, news, msgs) | 107% |
| QLogic (QLGC, news, msgs) | 78% |
| Microsmuse (MUSE, news, msgs) | 73% |
| E.piphany (EPNY, news, msgs) | 66% |
| Abgenix (ABGX, news, msgs) | 62% |
| Protein Design Labs (PDLI, news, msgs) | 58% |
| Genentech (DNA, news, msgs) | 57% |
| Network Solutions ** | 43% |
| i2 Technologies (ITWO, news, msgs) | 36% |
| MicroStrategy (MSTR, news, msgs) | 35% |
| Rambus (RMBS, news, msgs) | 34% |
| Avanex (AVNX, news, msgs) | 30% |
| VeriSign (VRSN, news, msgs) | 30% |
| Etek ** | 29% |
| webMethods (WEBM, news, msgs) | 23% |
| FreeMarkets (FMKT, news, msgs) | 21% |
| Phone.com (PHCM, news, msgs) | 20% |
| Incyte Genomics (INCY, news, msgs) | 16% |
| Terayon Communication (TERN, news, msgs) | 16% |
| Commerce One (CMRC, news, msgs) | 13% |
| Affymetrix (AFFX, news, msgs) | 11% |
| Virata (VRTA, news, msgs) | 0% |
| Internet Capital Group (ICGE, news, msgs) | -8% |
| Inktomi (INKT, news, msgs) | -15% |
| Aether Systems (AETH, news, msgs) | -16% |
| Infosys Technologies (INFY, news, msgs) | -23% |
| Powerwave (PWAV, news, msgs) | -29% |
| Akamai Technologies (AKAM, news, msgs) | -31% |
| Ventro (VNTR, news, msgs) | -35% |
| Xcelera.com (XLA, news, msgs) | -38% |
| Qualcomm (QCOM, news, msgs) | -45% |
| Average | 33% |
| Nasdaq-100 | 6% |
| S&P 500 | 4% |
| Dow Industrials | 5% |
As the Grim Reaper closed in, Don Quixote renounced his quest for redressing the wrongs of the modern age. We are following a similar course. We have turned from the don’s path, and instead are employing modern technology to capture some of the modern exponents of the Golden Age. In our computer, we have collected 765 bearish thoughts from one of the leaders of the Old-Hearted cult, the editor of a certain leading financial tabloid, and we have programmed computers to generate them at random as we write.
• There's light at the end of summer, 7/28/00
• Meet the Willy Mays of finance, 7/21/00
• Investors cap bullish week: Will Greenspan spoil it? , 7/14/00
more...
On another front, we have vowed that despite our inability thus far to convince the 75-plus chairman of the Fed that Nasdaq moves such as we saw during August are rationally exuberant, we will be as vigilant as ever in trying to educate him as to the erroneous basis for his views and show him the wrongness of his efforts to talk stocks down.
At least Patrick Ewing has made some moves toward obeying our directive that he and Greenspan switch places for the good of sports fans and stock market investors. But we will not fail to be inspired by the don’s repeated efforts to come back from defeat. Rather than continuing to retrace the steps of the knight of La Mancha in Spain, we will retrace them in Washington, and in fact we expect to see his federal lordship imminently.
At the time of publication, Laurel Kenner was long Commerce One. Victor Niederhoffer was long S&P and Nasdaq Futures, but that could change at any time.
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.