Monday, November 06, 2006

Whitney Tilson: Opportunity to sample the treats



When it comes to owning stocks of the best-known businesses in the world, value investors usually feel like children looking through the window of the candy store, unable to afford the treats inside because they refuse to pay the prices such high-quality franchises typically bear. But a rare opportunity appeared over the past year for value investors to go inside the store and sample the treats.

First, buying low price-to-book stocks has produced superior returns over extended periods of time but there have also been periods of significant underperformance. Second, the average time in which growth stocks dominated was 37 months, whereas when value stocks returned to favour, they remained in favour for an average of 76 months. Interestingly, 76 months from the beginning of the latest value cycle in March 2000 took us to the middle of this year, which is when large-cap growth stocks started to outperform and traditional low price-to-book stocks started to underperform.


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