Growth stocks are all the rage now, especially for millennials who have experienced the rapid growth of technology companies from their youth to adulthood. But there may be some cognitive biases at play which are influencing investors’ preference for growth companies. What are these biases, and how can they be identified and offset?
Read on as value investors Harris Associates share why millennials currently don’t own value stocks, and why they should.
As a millennial working in the investment industry, trends impacting younger investors tend to pique my interest. Millennials (individuals born 1981–1996) are currently in a life stage marked by major financial decisions with large purchases, debt repayment and savings vying for attention. Regardless of an individual’s priorities, one point is difficult to dispute: how millennials invest can have serious implications for their long-term financial wellbeing.
From an asset allocation perspective, millennials generally seem more interested in owning high-flying technology stocks than traditional value names (stocks trading below their estimated worth). A recent Business Insider survey indicated the millennial subset’s favourite long-term stock picks are technology-oriented mega-cap companies with the top three responses (Amazon, Microsoft and Apple) representing nearly 20% of all votes. Yet millennial investors, more than any other demographic, may be best positioned to benefit from at least some value exposure in their equity portfolios.
The Millennial Mindset
Before exploring why millennials should own value stocks, it’s helpful to understand why they typically don’t. By now, the image of an experience-mongering millennial in pursuit of instant gratification is cliché; however, several well-documented behavioural factors may be contributing to millennials overweighting traditional growth stocks.
- Familiarity bias – Instinctually, people favour what they know. Familiarity can cause individuals to be loyal (sometimes irrationally so) to the things they’re exposed to most. For millennials, this bias commonly manifests itself as confusing “products I use regularly” with attractive investment opportunities. For example, shopping daily on an e-commerce website should not drive a decision to buy the company’s stock.
- Social proof – The cognitive tendency to base one’s own behaviour on that of others is known as social proof. For millennials, this factor is amplified by the integral role that technology plays in day-to-day life. In particular, social media and online review culture (i.e., seeking solutions that are “highest rated” or “most popular” among peers) may make millennials more likely to pursue top-performing or broadly recommended stocks when making investment decisions.
- Loss aversion – According to behavioural economists, individuals prefer avoiding losses to acquiring gains of equal magnitude. This cognitive bias explains why the pain of losing $20 outweighs the excitement of finding $20. In a relatively short timeframe, millennial investors have experienced three major market declines (driven by 9/11, the global financial crisis and Covid-19), potentially leading them to avoid historically out-of-favour value stocks for fear of suffering additional losses.
Setting Up for Success
Recent headlines indicate that many millennial investors have used pandemic-related volatility to increase their equity exposure. In tandem, the introduction of mobile apps that place investment opportunities at one’s fingertips (and even offer “free stocks” for downloading) has broken down the perceived barriers to investing for millennials. In light of greater accessibility – and our human behavioural tendencies – why should millennials own value stocks?
- Fundamentals are important. Benjamin Graham and David Dodd laid the foundation for value investing in Security Analysis,2 published in 1934. The book encouraged readers to estimate stocks’ intrinsic values using fundamental factors, such as company assets, earnings and dividend payouts, then seek securities trading at discounts to those values. Nearly a century later, fundamentals still matter, although they are sometimes overshadowed by enthusiasm around a particular company or dynamic CEO. For instance, Tesla (the number four response in the millennial stock pick survey) trades at an enterprise value 10 times that of Daimler (Mercedes-Benz) or BMW, which also have burgeoning electric vehicle businesses. Despite these valuations, Tesla generates significantly less cash flow than either peer and underperforms both on key fundamental metrics. At Harris Associates, we view the relationship between a company’s share price and its underlying fundamental value as central to investment success. By employing a team of experienced analysts whose primary mandate is to identify price-value discrepancies, we implement a disciplined, fundamentals-based approach that can unlock value on behalf of our investors.
- Diversification reduces risk. Results of a recent Glassdoor survey3 identifying millennials’ top 10 target employers look eerily similar to their list of favourite long-term stock picks. However, over-concentrating in shares of a company (or industry) can have dire consequences. For example, in 2001, 62% of Enron employees’ 401(k) assets were in company stock, leaving thousands of people to rebuild both careers and retirement savings upon the firm’s collapse. Aside from diversifying employment exposure, value stocks can offset outsized weightings to momentum stocks in passive portfolios. By trying to play it safe in a market-cap weighted index fund, millennials may unintentionally invite risk by loading into a handful of popular names.
- A long-time horizon creates opportunity. With even the oldest millennials looking at 25-30 years until retirement, this investor group has a relatively long time horizon. In value investing, patience presents opportunities. Harris has demonstrated over four decades of managing portfolios that discipline in the face of short-term volatility can reward investors. In contrast, attempting to outguess near-term price movements is a speculative task. Although trading has become cheaper and easier for millennials, leveraging these trends to chase performance may not produce long-term benefits.
The price-to-value for a stock is the ratio of the current stock price divided by the intrinsic value as calculated by the investment team’s valuation model. The price-to-value for a portfolio is the weighted average of the price to value for each stock in the portfolio.
Investing in value stocks presents the risk that value stocks may fall out of favour with investors and underperform growth stocks during given periods. The information, data, analyses, and opinions presented herein (including current investment themes, the research and investment process, and portfolio characteristics) are for informational purposes only and represent the investments and views of the portfolio managers and Harris Associates L.P. as of the date written and are subject to change and may change based on market and other conditions and without notice. This content is not a recommendation of or an offer to buy or sell a security and is not warranted to be correct, complete or accurate.
Certain comments herein are based on current expectations and are considered “forward-looking statements”. These forward looking statements reflect assumptions and analyses made by the portfolio managers and Harris Associates L.P. based on their experience and perception of historical trends, current conditions, expected future developments, and other factors they believe are relevant. Actual future results are subject to a number of investment and other risks and may prove to be different from expectations. Readers are cautioned not to place undue reliance on the forward-looking statements.
This article was originally published as “Why millennials should own value stocks” by Harris Associates, an affiliate of Natixis Investment Managers.
The team at Harris Associates are value investing specialists, who practice active management of high conviction investment ideas across all industries and geographies. Through bottom-up idea generation and rigorous fundamental research, specialists discover value in companies currently valued at a discount to their estimated intrinsic value, and sell when stock prices converge with value estimates.
Endowus currently offers two funds (as of 22 Oct 2021) from Harris Associates, namely the Harris Associates Global Equity Fund and the Harris Associates US Equity Fund.
Get started building your own portfolio with funds like these on Endowus Fund Smart.
1 Business Insider survey - We asked hundreds of millennial investors for their top long-term stock pick. Here are the top 7 most popular responses. 2 Graham, Benjamin and Dodd, David (1934). Security Analysis. McGraw-Hill.3 Glassdoor - The 10 companies millennials most want to work for all have one crucial thing in common
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary. Before investing, consider the fund’s investment objectives, risks, charges, and expenses. You may obtain a prospectus or a summary prospectus on our website containing this and other information. Please read it carefully.CFA® and Chartered Financial Analyst® are registered trademarks owned by the CFA Institute.
This document is provided by Natixis Investment Managers Singapore Limited (company registration no. 199801044D). The content of this document is strictly confidential and has been prepared for informational purposes only and for the exclusive use of institutional and professional clients or prospects. Under no circumstance may a copy be shown, copied, transmitted or otherwise distributed to any person or entity other than the authorised recipient without the advance written consent of Natixis Investment Managers Singapore Limited.
Investment involves risk. The information contained herein does not constitute an offer to sell or deal in any securities or financial products. The content herein may contain unsolicited, general information without regard to an investor’s individual needs, objectives, risk parameters or financial condition. Therefore, please refer to the relevant offering documents for details including the risk factors and seek your own legal counsel, accountants or other professional advisors as to the financial, legal and tax issues concerning such investments if necessary, before making investment decisions in any fund mentioned in this document.
Past performance information presented is not indicative of future performance. Certain information included in this document is based on information obtained from other sources considered reliable. However, Natixis Investment Managers Singapore Limited does not guarantee the accuracy of such information.
Natixis Investment Managers Singapore Limited is a business development unit of Natixis Investment Managers, the holding company of a diverse line-up of specialised investment management and distribution entities worldwide. The investment management subsidiaries of Natixis Investment Managers conduct any regulated activities only in and from the jurisdictions in which they are licensed or authorised. Their services and the products they manage are not available to all investors in all jurisdictions. It is the responsibility of each investment service provider to ensure that the offering or sale of fund shares or third party investment services to its clients complies with the relevant national law.
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Past performance is not an indicator nor a guarantee of future performance. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund.
Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endow.us Pte. Ltd (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus Pte. Ltd., its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.