Fed’s announcement to raise interest rates is never a piece of positive news to the markets.
Everything sank to a bear market territory, stocks, bonds, and even Bitcoin.
This crash, however, was the wind beneath the wings of all the bears. These pessimistic investors expect prices to decline and argue that bonds and value stocks are superior to high-growth and innovation investments.
The tech stocks and crypto assets are mere speculations to them.
But is it true?
No, it’s false if you examine some empirical data.
Let’s not even waste time discussing bonds as a viable investment option. They returned 3.3% on average per year in the last decade, not enough to cover inflation. As Ray Dalio put it, “investing in bonds became stupid.”
Instead, let’s compare value and growth investing.
Don’t get me wrong; I’m not arguing the case against the value approach. As a former Wall Street analyst, I’ve always been a big fan of value investing, and I consider myself a disciple of Warren Buffett’s school.
The question here is whether tech and innovation investing are just speculation and will underperform the conservative value approach in the long run.
Buffett vs. Wood
So, first, revisit the past performance of the two most recognized funds from both camps, Berkshire Hathaway and ARK Innovation Fund.
Warren Buffett and ARK’s Cathie Wood have built an army of devoted devotees in their respective approaches.
The innovation-focused investor is likely to purchase any of ARK’s holdings.
The cash-flow-focused investor is unlikely to purchase Berkshire’s holdings.
Also, it’s important to point out there’s no winner or loser between these two phenomenal funds.
The question remains, which approach has proven more effective over the last five years?
When in doubt, zoom out
As always, the market is the ultimate referee.
Even though ARK has slightly outperformed Berkshire during a shorter timeframe, comparing the funds from a much more relevant investment horizon is essential.
Here’s a look at the last five years comparing these two investment approaches.
As you can see, despite a 50% crash in ARK’s Innovation Fund, the tech-focused approach has still more than doubled the return of the cash-flow-focused investment approach. ARKK is up about 258% in the last five years, and Berkshire is 85%.
In fact Berkshire hasn’t even beat the S&P 500 index in the five-year period.
Indeed, past results do not guarantee future performance. But, this simple comparison proves that growth investing has been a smarter way to make money for the last five years.
Does it mean that value investing is a bad investment?
But in times of extreme volatility, people tend to forget about the big picture. Whether it’s your house, stock portfolio, or bitcoin, short-term swings are irrelevant.
What happens within a year is just noise.
Investing is a humbling experience.
Which one is appropriate for you only depends on the time horizon and your risk profile. If you’re a type of investor that checks every 10 minutes, you should invest in Berkshire to keep your sanity. But if you understand the innovation and have at least a 10-year horizon, you’ll be rewarded with higher than average returns.
And whether you are a growth or value investor, you can be subjected to inevitable nature market volatility.
It’s a humbling experience.
Finally, it is crucial to remember that there aren’t many alternatives left to invest in. Bonds are a guaranteed loss, gold is dead, and if you keep cash, inflation will devalue 90% of your money in 10 years.
It doesn’t pay to be a bear anymore.