Gmo Case
Gmo: the Value Versus Growth Dilemma
GMO: The Value Versus Growth Dilemma |
1. What is value investing? What is its rationale? What are GMO’s main arguments in favor of value investing?
Value investing is a way of investing in company stocks that are considered either undervalued or out-of-favor by the market. In other word, a value investment is one where the intrinsic value of the stock is not accurately reflected in the current market valuation. The underlying reason of too much decreasing in the stock price is that the company may be losing market shares or even in trouble due to market’s panic attributed to negative rumors as well as having management problems. Since the market price has dramatically descended, the book to market ratio of that stock will conversely increase. Consequently, this fraction is an important indicator that value investors will look at in order to justify if a particular stock is value stock or not.
The rationale for investing in such value stock is that after the forces that are depressing the stock have diminished, the market price of value stock can only go upward from the bottom position to realize the stock’s hidden potential value at some point in the future. Notably, the key assumption is that once the market finally acknowledges the inefficiency that the price is too low when compared to the expected future returns, it will bump up the price and the value investors will directly benefit from the capital gain on those value stocks.
Basing on this ground and reinforced with stellar performance of the U.S. Active as well as Pelican Fund during 1980s to 1990s, GMO strongly believe that a portfolio of securities that sells below is inherent worth or that may be worth more after fundamental changes can consistently provide above average returns relative to the total market.
2. What are the differences between value and growth investing? What are their relative merits?
Disparity | Value Investing | Growth Investing |
GMO: The Value Versus Growth Dilemma |
1. What is value investing? What is its rationale? What are GMO’s main arguments in favor of value investing?
Value investing is a way of investing in company stocks that are considered either undervalued or out-of-favor by the market. In other word, a value investment is one where the intrinsic value of the stock is not accurately reflected in the current market valuation. The underlying reason of too much decreasing in the stock price is that the company may be losing market shares or even in trouble due to market’s panic attributed to negative rumors as well as having management problems. Since the market price has dramatically descended, the book to market ratio of that stock will conversely increase. Consequently, this fraction is an important indicator that value investors will look at in order to justify if a particular stock is value stock or not.
The rationale for investing in such value stock is that after the forces that are depressing the stock have diminished, the market price of value stock can only go upward from the bottom position to realize the stock’s hidden potential value at some point in the future. Notably, the key assumption is that once the market finally acknowledges the inefficiency that the price is too low when compared to the expected future returns, it will bump up the price and the value investors will directly benefit from the capital gain on those value stocks.
Basing on this ground and reinforced with stellar performance of the U.S. Active as well as Pelican Fund during 1980s to 1990s, GMO strongly believe that a portfolio of securities that sells below is inherent worth or that may be worth more after fundamental changes can consistently provide above average returns relative to the total market.
2. What are the differences between value and growth investing? What are their relative merits?
Disparity | Value Investing | Growth Investing |