LACERS Financial Report: Value or Growth Investing: Why Choose Only One?


Michael Wilkinson, LACERS/Legal Representative

By Michael R. Wilkinson, LACERS/Legal Representative

One of the challenges for LACERS in investing for the long term is how to diversify investments, a subject I return to in my column from time to time. If there were one perfect investment, we would not need investment experts, and instead we would all put our money there.

When we look at stocks, one way to differentiate them is using the term value and growth to categorize stocks by how expensive they are compared to some benchmark such as price to earnings ratio or cash flow. The more expensive stocks are called growth stocks, while the cheaper stocks are called value stocks. Think of growth stocks as those that have been bid up to very high prices by excitement in the markets, while value stocks are underappreciated by investors. Value stocks are the Rodney Dangerfield of investments (“I don’t get no respect!”). Successful value stock investors include Benjamin Graham and Warren Buffett.

When stock prices are going up everyone wants to be in growth stocks, and those investors seem brilliant. When the inevitable cycle changes (think the bursting of the Internet bubble), then value stocks post big gains and growth investors sulk. Investment magazines are full of charts showing the cycles where value stocks outperform growth stocks and when the opposite is true. There are competing theories on how to predict these trends to take advantage of the cycles going forward, but no agreement on how to know when the cycle is changing.

So, how does LACERS handle this? LACERS invests in both value and growth stocks and keeps a good balance of both investment styles. The LACERS investment policy does not believe in market timing and as such does not try to time the growth and value cycles. This balanced approach is part of LACERS’ overall policy of diversification that helps ensure that LACERS is positioned to take advantage of longterm investments without making heavy bets on any one investment or market sector.