These two billionaires are split on the 2021 investment outlook
If you’re feeling undecided about whether the booming returns for high-growth tech stocks can continue into 2021, you’re not alone.
Even famous (billionaire) investors who’ve been in the game for 50 years are kind of split on the issue.
Billionaire No 1 (and fighting out of the bear corner) is Jeremy Grantham, co-founder of asset management firm GMO.
His track record includes early calls on the 2000 dot-com bubble and the 2008 financial crisis.
In a recent note published on GMO’s website, he said the 2020 post-Covid rally marked a rapid acceleration of the long-term bull market, which has been in place since 2009.
Now, stocks are exhibiting the characteristics of a “major bubble”.
When will it pop? Grantham said that either in the late northern spring (May) or early northern summer (June), “it will have paid for you to have ducked” a pending selloff.
However, he concedes that timing the end of bubbles has a “long history of disappointment”.
“Calling the week, month, or quarter of the top is all but impossible,” Grantham says.
Broadly, Grantham’s rationale links the end of the bull market with the mass rollout of a COVID-19 vaccine.
While it will be a great thing health-wise, the dust will settle on a sub-par economy without any help from additional government stimulus.
At that point, valuations will look “absurd”, he said.
So how should investors play it?
Grantham argued that investors should be positioned towards value stocks – which are coming off their worst annual performance against growth…ever.
On a global asset allocation he also prefers emerging markets equities, which relative to US stocks are at their equal lowest level of the past 50 years.
And he concluded with this parting shot against speculative tech: investors should implement the “greatest avoidance of US Growth stocks that your career and business risk will allow”.
But when it comes to value vs growth, US billionaire investor Howard Marks had a more nuanced take.
In the latest of his well-known market memos, Marks contrasted his investment philosophy with that of his son Andrew — also a money manager.
Having started his career in the late-1960s, Marks was raised with traditional investment principles.
Broadly, that means valuing a company by looking at what it earns, extrapolating those profits into the future and discounting them back to a present value.
Fast forward to 2020, and it’s a different landscape. Many high-growth tech stocks are valued at high multiples of sales, let alone profits.
But these days according to Marks, “value can be found in many forms”.
“The fact that a company grows rapidly, relies on intangibles such as technology for its success and/or has a high p/e ratio shouldn’t mean it can’t be invested in on the basis of intrinsic value,” Marks says.
He said one reason for the shift is that with the rise of the internet, quantitative information such as company accounts is much more readily available.
As a result, success is “more likely to be the result of superior judgments about qualitative factors and future events”.
That could mean the qualities of a management team take precedence over financial metrics.
This insight will also be music to the ears of the growth brigade:
“The fact that a security carries high valuation metrics doesn’t mean it’s overpriced, and the fact that another has low valuation metrics doesn’t mean it’s a bargain.”
Clear as mud? Marks conceded there was some generalising in his thought process and he’s not necessarily wedded to his ideas.
But in a historical context he cited the example of Amazon 20 years ago, which was viewed as an overpriced tech stock before the quality of its management team, logistics practices and tech innovations took it to the company it is today.
“I guess the answer is ‘value is where you find it’,” Marks says.