📈Tortoise & Tar
Today, we’re going to cover stock valuations and the difference between growth vs value stocks. So, why the f**k is there a picture of a Tortoise smoking a cigarette? One, because it’s funny, and two, because the fable provided us with a good title.
Last we talked about stocks, we left off with the recommendation to strongly consider an index fund like the S&P 500 which lets you participate in the performance of the ~500 of the biggest and most profitable companies in the world.
Now, let’s go a bit deeper on stocks to talk about Growth vs. Value. First, a definition:
Source: Investopedia
Said another way, Growth stocks trade on the future while Value stocks trade at a discount. To illustrate this point - and shoehorn in the fable - let’s compare the fortunes of Altria and Amazon.
You know Altria ($MO) even if you don’t recognize the name. They’re the cigarette company - and our Tortoise - that produces brands you know like Marlboro, Black & Mild, Copenhagen, and Skoal. Amazon ($AMZN), the company that keeps your front porch loaded up with boxes and is responsible for 50% of your credit card charges, will play the role of the Hare.
There isn’t a ton in common between these two companies - and that’s the point. Amazon makes a bulk of its revenue by selling products directly to you, the consumer, while also dabbling in streaming services and offering a very lucrative cloud web service called AWS. So, Amazon is a modern conglomerate in every way - bullying its way into any industry it can expand into on the expectation that profitability will come sooner than later.
Meanwhile, Altria is something of a throwback. Get this: they actually spend time and money to produce a physical product and then spend more money to market it to people. Seems like a lot of work, Bezos couldn’t be bothered with physical labor like that. Even worse, they sell products that are highly regulated and fading in popularity. To be fair, they have invested in things like JUUL, Cronos (Cannabis company), and some alcohol brands to try and stay modern, but clearly, they are very different from Amazon.
If they’re such different companies, why compare them? Because over the last thirty years, Growth Hare Amazon and Value Tortoise Altria are both in the top-10 best-performing stocks in the S&P 500:
That’s the beauty of the stock market: despite competing in two completely different industries, both have produced outstanding returns over a long period of time.
So, why do we label some stocks “growth” and some stocks “value” if they can both produce similar returns?
The Growth and Value tags are meant to communicate whether you’re investing in companies that are making money now (and may be undervalued by the market) versus companies that expect to make money in the future.
The key metric is net income, which just means how much money the company made each year.
For the first 20 years of Amazon’s existence, it was losing money or scrapping out a profit, while Altria was making over $6 Billion a year. That's Billions, with a B.
So value wins right? This investing thing is easy, follow the money.
Not so fast my friends. While the Tortoise (MO) had a lead over the last several years, the Hare (AMZN) has quickly made a move...
That parabolic uptick is all of Bezos’ bets hitting at the same time that a global pandemic put everyone inside. When Amazon finally hit its stride its profits exploded and its Net Income not only passed Altria’s but clocked in at a dizzying $26 Billion last year alone! That is insane and amongst the highest in the history of the stock market.
What’s the Upside?
Value stocks tend to be companies like Altria that make money now and may be undervalued by the rest of the market based on the products or services they produce. Growth stocks tend to be companies like Amazon that may need time for their bets to work out, and can generate massive returns if they do.
In hindsight, Amazon is a no-brainer. But it can be hard to pick the right growth company at the right time. Bezos himself reflected on this not long ago:
So, it is critically important to get excess cash motivated into the stock market, if nothing else than to outpace inflation. If you’re just getting started, don’t try to choose growth vs value - an S&P 500 Index fund contains both.
Why choose the tortoise or the hare when you can bet on both in the same fund?
For Your Weekend
This is where we’ll post a round-up of essays, podcasts, and streaming shows to check out over your weekend. We cast a wide net so you don’t have to.
Read:
“Why Does China Have 1.4 Billion People and No Good Bands?” by Lauren Teixeira (Foreign Policy)
The most successful Mongolian conquerors since Genghis Khan aren’t on horseback but on the drums. They’re called the Hu, and over the past year their bone-vibrating hard rock, which combines traditional Mongolian instruments and throat singing with Western rock and metal, has become a breakout hit with fans around the world—and made them official cultural ambassadors for the country.
“Trader Joe Wrote a Memoir” by Carrie Battan (The New Yorker)
The book is a sort of “Kitchen Confidential” for the grocery business, but without the drugs or rage.
[H]e used the financial resources and customer insights that he’d acquired through Pronto Markets to start Trader Joe’s, a grocery store known for its seemingly irreconcilable characteristics: high-quality, health-minded foods self-branded and sold at bargain prices. Coulombe would build an empire rooted in small-scale cleverness and common sense, exploiting loopholes and product discontinuations, zigging where others zagged, and turning the rest of the grocery business’s trash into treasure for Trader Joe’s.
Watch:
Squid Game (Netflix)
The Korean megahit is Netflix’s most-watched show ever, with over 100 million accounts estimated to have tuned in. The show pits hundreds of cash-strapped players against one another in a violent competition to win 45.6 billion won (~$38.5 million). Games include ‘Red Light, Green Light’ with sniper rifles, and tug of war over a hundred-foot pit.
The performance of the ensemble cast and the tight script keep the dystopian violence grounded and real. By the end, you’re ready for season two.